Too many taxes and compliance burden

Karamjeet Singh

Professor Richard Thaler, who recently got Nobel Prize in Economics, tweeted that good economic policies are often not successful because of poor implementation. Demonetization and Goods & Services Tax (GST) are two such good policies in India, which are being debated for improper planning and poor implementation. The idea of introducing GST was to simplify taxation structure and to help in the ease of doing business. Unfortunately it was implemented in a discordant manner.

Great potential

It was expected that inflation would decrease due to reduction in cascading of taxes; comfortable business environment due to the introduction of one nation, one market and one tax; decrease in black transactions due to self-regulating and non-intrusive electronic tax system; more informed customer due to simplified tax regime and reduction in multiplicity of taxes. 

Current situation 

Contrary to the win-win situation, both consumers and traders are feeling the pinch of GST. As per the recent survey by the RBI, the index of business expectations and consumer confidence index have come down in the second quarter of current financial year compared to the previous quarter while inflation expectations have gone up. The consumer is burdened with higher rates and traders are upset due to procedural, technical and compliance issues due to multiple registration, multiple tax rates and filing of multiple returns. There are gaps in GST preparedness due to lack of clarity on provisions and skilled resources. 

The level of compliance continues to be low in filing returns. The total revenue of GST paid under different heads (up to October 23) for the month of September was Rs 92,150 crore including Rs.48,948 crore IGST. Integrated GST is mainly from exporters, major portion of the collection has to be refunded to exporters as there is no GST on exports. Thus, the collection of Rs 92,150 crore includes settlements to be made under Input Tax Credit. Therefore, the net collection is much less. 

Course correction 

The small taxpayers with turnover up to Rs 1.5 crore constitute 90% of taxpayers' base but pay only 5-6% of the total tax. The Central government recently allowed small traders and businessmen having turnover of up to Rs 1.5 crore to file GST return quarterly instead of monthly. But this move will be counter-productive as it is going to adversely affect the small scale industries (SSIs). Since small entrepreneurs and traders supply raw material or semi-finished products to the big players and they will file quarterly returns now, the accounts of buyers will be settled after three months only and if there is any discrepancy, it will lead to further delay. They will have to wait for 3-months to settle their accounts and to get input tax credit. This will not only increase their investment in working capital but large manufacturers will prefer not to get goods from SSIs. 

Issues of exporters, reverse charge mechanism, maintenance of revenue neutrality, rapid growth of grey market, digital signatures, revision of returns and tracking of e-commerce transactions are still major concerns.

Simple solution

The GST cannot be rolled back. Now we have to create mechanism to properly plan it to suit our requirements. Revenue Secretary Hasmukh Adhia recently talked about complete overhaul of the tax rates to reduce the burden on small and medium businesses. This is major issue and possible solution is the use of the concept of zero-based budgeting for fixation of all GST rates. 

Instead of multiple tax rates, the best way is to keep the regime uncomplicated with one or maximum two tax rates apart from undertaking a proper overhaul of the procedures that have increased the compliance burden. There is no justification for keeping real estate, petroleum and alcohol outside the ambit of the GST. However, luxury goods and hazardous items need to be identified for imposing additional cess.   

— The writer is Professor of Finance & Strategic Management, University Business School, PU, Chandigarh