Flows of 365 days implementation of GST and learning

Reeling from the messy implementation of demonetization in November 2016, rolling out of half- baked Goods and Services Tax (“GST”) came as a tide in the lives of Indian businesses and taxpayers.Rightly learned from the natural law theory that being flawless is not something which happens at once, it’s a process of crawling, falling and then learning to walk, but being awake to the ebbs and flows of this process, is what that marks success in long run. Learnings of GST in its past one year is no different…..

“Any change, even a change for the better, is always accompanied by drawbacks and discomforts.” ~ Arnold Bennett

With seeds initially sown by the then Prime Minister Shri. Atal Bihari Vajpayee in the year 2000, GST is definitely not an overnight thought. On July 1, 2017, history was created when the country witnessed the biggest and most important economic reform since Independence – GST going live, marking an end to decades of political wrangling to enlist political support & build consensus towards cumbersome issues of revenue neutrality, dual control etc.

When the clock struck midnight on June 30, 2017, Central Hall of the Parliament, packed with top dignitaries including our Hon’ble Prime Minister Shri. Modi, presented historical affair of welcoming grand indirect tax reform, subsuming a dozen of state and central levies built up over seven decades with a one national GST. Hailed as “One Nation One Tax”, survival of GST was no less than a prodigy, specially, in a federal constitution like ours. Importantly, GST has weathered the ride to a bumpy road of challenges while bringing ease of doing business in India, dissolving state boundaries, simpler and paperless taxation structure amongst other benefits. Undoubtedly, initial hiccups faced in the first year of GST implementation took a toll on businesses in initial months, but it might not be fair to judge its success on that basis. Nonetheless, with an optimistic view of brighter and stable future, let us look back on the journey of GST so far to identify key hits and misses along with still needed improvements under ‘work-in-progress’ GST.

Kudos to GST!!

Simplified tax structure bringing ease of doing business in India:

Separate Taxes by Central Government, State Governments and the local governments had resulted in difficulties and harassment to the taxpayers in complying with different types of taxes and their compliances. GST has certainly consolidated the multiplicity of taxes in India and has thus created a simplified tax regime. It has replaced around 17 federal and state levies to unify a country of 1.3 billion people into one of the world’s biggest common markets to promote ease of doing business.

No more hit of double taxation on pockets of consumers:

Owing to Indian government’s federal structure, where there are two taxing authorities – the central government and the state government(s), the Country had witnessed overlapping of powers between the state government(s) and the central government in pre-GST era. Even though the pre-GST indirect tax system treated goods and services differently, in certain cases where goods and services with other types of supplies were being packaged as composite bundles & offered for sale to consumers under a variety of supply-chain arrangements, there was double taxation like in case of AC Restaurant services, works contact, software, IPR etc. GST law has dealt with the issue properly to clearly demarcate the activities to be treated as a supply of goods or supply of services in GST.

Seamless flow of credit – the backbone of GST:

Tax cascading was one of the daunting flaws of the pre-GST indirect taxation system. Cascading of tax occurs when each successive transfer is being taxed inclusive of previous tax levied like levy of VAT over excise duty, non-cenvatable taxes and cesses like CST etc. With the seamless flow of input tax credit throughout the supply chain, GST has provided the benefit of enhanced input tax credit pool for businesses with minimal cascading.

Continuous rationalization of tax structure making commodities affordable for consumers:

Multiple tax rate structure in GST was long debated to cause unease of business when GST was envisaged as a powerful mechanism to bring a system of uniform taxation. More particularly, the highest tax rate slab of 28% was the center of pain for taxpayers with even the commodities of general consumption falling in the highest slab. Understanding concerns of the trade, the GST council has made a wholesale shift of numerous items from the peak 28% tax slab to the more reasonable rate of 18% in last one year which has benefitted the trade a lot in terms of price hike control as well as international competitiveness. Consumers too can now afford various such commodities at affordable prices.

Continuous efforts to simplify composition scheme for the advantage of SME and MSME sector (the heart of Indian economy):

To support small taxpayers an option in the name of composition levy is provided where the registered person can opt to pay tax at a specified percentage of the turnover, without entering the GST credit chain and thus be relieved from the detailed compliance of the provisions of law. To attract more taxpayers under the scheme, number of improvements have been made in this one year viz, increasing the threshold limit from INR 50 lakhs initially to INR 75 lakhs and further to INR 1 crore for other than special category states barring Uttarakhand and J&K, rationalization of applicable rate of tax etc. Further, recommendations of the GST Council to increase the threshold limit to INR 1.5crores and allowing supply of services by a composition taxpayer upto Rs. 5 lakhs per annum are awaiting necessary amendments in GST Act.

Extinction of check post with the introduction of E-Way Bill system results smooth movement of goods and thereby significant reduction of turnaround time for transportation:

After failing to face the brunt of the high volume of E- Way bills generated on the very first day of launch in February 2018, due to which the provision got deferred till April 1, 2018, the government has managed to ensure a smooth rollout of the E-Way Bill system since then. For intra-state movement of goods, the provision was implemented in a staggered manner by June, 2018. With the removal of inter-state check posts, E-Way Bill system has led to quicker and smoother movement of goods, reducing the resultant turnaround time for vehicles. As per rating agency ICRA, in states such as Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar, which were one time known for notoriously high waiting time spent at their borders, the impact has been much more pronounced.

More changes loom

Robust GSTN network to handle compliances with least technical glitches:

After a shaky experience for first year of GST, it is imperative that IT system (i.e. GSTN network) must be developed to handle the magnitude of the project with least minimal fall outs. Normally, when a reform of this magnitude is undertaken, the law is usually framed about a year in advance so that the technology backbone was given enough time to conduct pilot projects. The GSTN portal had faced glitches in the initial months of return filing. While some critics have blamed Infosys for outages in the system, some are of the view that the last moment finalization of rules relating to returns took a toll on system's performance. These bottlenecks resulted in repeated extensions of due dates for compliances, which increased concern amongst taxpayers. Nonetheless, looking into the future of GST, it is high time that the portal should be equipped to take toll of all legislative changes on real-time basis and tested beforehand to tackle the voluminous task efficiently.

Clarity on return filing system and matching of credits:

Due to technical challenges, the matching concept as was initially envisaged could not take off at all. Consequently, the interim procedure of filing summarised return in Form GSTR-3B with outward supplies details in Form GSTR-1 is in place. The GST council in its 27th meeting held on May 4, 2018, had approved the revised design of GST Returns that would require a taxpayer to file only one return every month and it sets a period of six months for the transition to take place. The process is designed in 3 stages, wherein stage 2 return will have facility for invoice-wise data uploads by the supplier and also facility for claiming the credit on self-declaration basis by the recipient, as in case of GSTR 3B now. After six months of this stage, the facility of provisional credit will be withdrawn and credit will only be limited to the invoices uploaded by the sellers from whom the dealer has purchased goods.

It is utmost required that the system of return filing and matching of credits get freeze, in the absence of which the dealers are facing problems relating to claims of input tax credit, which may lead to unnecessary litigation.

Further rationalization of GST rates:

Although multiple rate structure in Indian GST is a clear deviation from the international norm of a dual or single tax rate, but it is to an extent understandable considering diversity in Indian population. Even then, the highest tax rate slab of 28% is uncalled for except for few sin items like tobacco. Going by the reports, the World Bank had noted that 28% is the second highest rate among 115 nations that have GST and the highest in Asia. Appreciating the efforts of Government to prune down the list of items under 28% slab, still there is a need to further rationalize the same as certain items of mass consumption like colour television, air conditioners, etc. are as on date falling under 28% slab.

Amendment in the list of blocked credits to allow legitimate credits:

Negative list of GST ITC as prescribed under Section 17(5) of the CGST Act, 2017, blocks credit on specified items like motor vehicles, free samples, construction of office/ factory, etc. There is a strong need to prune down this list to allow credits in those cases where appropriate GST has been paid on its disposal. Further, expenses pertaining to sales promotional activities must be allowed and should not be barred in the name of personal consumption, free samples, gifts etc.

Challenges in the inclusion of petroleum products in GST:

At the time when diesel and petrol prices were touching multi-year highs, Union Petroleum Minister, Shri. Dharmendra Pradhan had said that petroleum products should be included under GST to help consumers pay a rational price. While the centre wants liquor and petroleum products should come under GST, states are keen to retain their power to tax these items as they are major sources of revenue for them. The blocked road towards the inclusion of liquor and petroleum products in GST is causing hardships on related sectors and others dealing or consuming these items who continue to incur huge GST impact on all inputs without any set-off.

Scrapping, rather deferring implementation of Section 9(4) reverse charge provisions:

Section 9(4) of the CGST Act, 2017, shifts the liability to pay tax on registered recipient under reverse charge when the supply of taxable goods or services are made by an unregistered supplier. However, in view of the practical difficulties being faced by the trade in the application of these provisions, the same was deferred by virtue of exemption notification till June 30, 2018 which is now proposed to be deferred further for 3 months till September 2018. Application of such provisions must be abolished in toto as Industry Inc. has faced many practical challenges in keeping track of such transactions, issuing consolidated self-invoice, compliance burden etc.

Others:

• Synchronisation of Technical part of GST i.e. GSTN with GST Law part;
• Developing alternate ways rather than denying eligible credit to recipients in the guise of non-payment of taxes by the supplier;
• Smooth and Fast disbursal of refunds on exports, though lots of efforts are being taken regularly to ease the process;
• Dispute Resolution mechanism in case of contrary judgments by two Authorities for Advance Ruling by formation Centralised Appellate Authority;
• Minimising state-wise differential provisions as to threshold or specified goods requirement for E-Way Bill in case of intra-state movement of goods as recently seen in Tamil Nadu, Delhi, Mizoram etc.
• Providing a suitable link to determine the jurisdiction of taxable authority of a taxpayer.

Our Comments:

Despite of being mocked as Gabbar Singh Tax by opposition, GST - India’s new unified nationwide value-added system of taxation has come a long way in simplifying the complex tax structure of the Country.The initial implementation issues which took a toll on businesses have been dealt with appropriately by the GST Council either by relaxing the norms or by frequent extension of dates.  As per the Economic Survey 2017-18, authored by CEA Shri Arvind Subramanian, GST implementation has increased indirect taxpayer base by more than 50% with 34 lakh new businesses coming into the tax net. Preliminary analysis of data shows GST registrants rose mainly on account of large increase in voluntary registrations, especially by small enterprises that buy from large enterprises and want to avail themselves of input tax credits.GST collections hit the highest INR 1 lakh crore mark in March this year prior to which the collections did not even touch INR 95,000 crore mark. India’s GDP is projected to grow back in the range of 7% to 7.5% in 2018-19 primarily due to the implementation of the tax.

Initial anxieties are settling to an extent with the passage of time, but still, there is a long way for GST to eventually be called a ‘Good and Simple Tax’ in real sense. Indeed, it is heartening to see receptive approach of the Government in easing out practical challenges of the Trade through either FAQs, E-fliers, twitter account, notifications/circulars etc., but, with the quantum of rulings coming from respective states’ Hon’ble Authority for Advance Ruling at high pace, it is also clear that still GST is a work in progress with lots of issues still unexplained and unearthed.

As GST’s first anniversary passes, the Government is expected to tweak the tax regime through amendments during the monsoon session of Parliament in July. The objective would be to make it more simpler and friendlier with easy return filing process and credit matching system. Formats of annual return are still awaited which may also see practical challenges in understanding. Additionally, strengthening tax administration must also be on the cards. According to Ms Sarna, Chairperson, CBIC, it might take another couple of years or more for GST to completely stabilize and settle down. However, for the first year, it has not been bad at all.

“The only way to make sense out of change is to plunge into it, move with it, and join the dance….” ~ Alan Watts