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Posted at: Nov 15, 2017, 12:33 AM; last updated: Nov 15, 2017, 1:33 AM (IST)

Towards a good and simple tax

There is need to take a break from tinkering with the GST rates. The focus, instead, should now be on the plumbing, ie on the processes and technology backbone — GSTN — even as we work to get the remaining sectors in the GST fold.
Towards a good and simple tax

Mythili Bhusnurmath

Senior consultant, National Council of Applied Economic Research 

Much  was expected from the Goods and Services Tax (GST) Council meet in Guwahati early November. In the event, it exceeded all expectations. Contrary to reports in the run-up to the meet, of fireworks between Opposition state finance ministers and the ruling NDA, the council demonstrated, for the 23rd time (!), its ability, and willingness, to come together to find common ground on admittedly complex issues. 

The sweeping rationalisation (read reduction) of rates and simplification of procedures is, no doubt, the biggest takeaway from the Guwahati meet. Yes, it is true that frequent tinkering reflects poorly on the tax regime introduced less than six months ago. But what is notable is that, as in past council meetings, all decisions were taken unanimously in the true spirit of 'cooperative federalism'. 

This is no mean feat in a country as diverse as India. Not only are issues and challenges very different across states, there is also very little in common even on basic items of consumption, making agreement on rates and exemptions a Herculean task. The oft-quoted example here is of how coconut oil is an item of everyday consumption in Kerala but a cosmetic in most other states. 

If despite all these challenges, the GST Council was able to reduce rates on 211 items spread across all tax brackets, cut the rate on standalone restaurants from 28 to 5 per cent (without input tax credit), raise the threshold limit for the composition scheme to Rs 1.5 crore, extend the deadline for filing GST returns and simplify the filing process, it is a remarkable achievement. 

So, is it win-win for all concerned — the union and state governments, businesses and consumers? Not quite! 

Then, what are the sticking points? 

Flaws in GST

1. Exclusion of key sectors

On the conceptual side, the biggest flaw is the exclusion of some key sectors, notably real estate, electricity and alcohol, from the GST regime. (Petroleum is also presently outside GST, but there is a provision to include it later). These sectors contribute about 37% of the tax revenue in most states, so keeping them outside the purview of GST takes away greatly from the GST's USP of 'one nation, one tax' and related benefit of transparency and audit trail. 

The essence of GST is transparency and audit trail, which makes it is next to impossible for the ultimate beneficiaries to escape the tax net. In fact, it is the perfect antidote for the transgressions in the real estate sector, where a majority of the transactions escape the tax authorities' radar. States, however, are reluctant to give up their taxing powers in respect of stamp duties levied on real estate transactions. Likewise, alcohol and tobacco are big cash cows for state governments; hence the reluctance to cede taxing powers. 

2. Procedural & compliance issues

The other major sticking points relate to procedural and compliance issues. Both are likely to ease now that the limit for the composition scheme has been raised to Rs 1.5 lakh and returns can be filed quarterly, instead of monthly. This will give both taxpayers and the IT backbone, the GST Network (GSTN), some respite. The GSTN has done a commendable job: since the rollout of GST on July 1, the portal has handled over 2.26 crore returns. But it has not proved equal to the gargantuan task of handling so many returns and in a very short period of time. The tendency of businesses to file returns at the very last minute compounds the problem. The net result is that despite the GSTN's claim that the system is robust, taxpayers are far from happy. 

According to the vast majority, the GSTN system frequently stalls, with the result that it takes hours to file returns. With familiarity with computers being poor and net connectivity, even in the metros, patchy, chaos is inevitable. Online filing by close to 100 lakh businesses, many of which are filing returns for the first time, is bound to challenge the best of systems and GSTN.   

3. Reverse charge mechanism issue

There are a couple of other niggling issues. Under GST, the buyer is required to pay tax on behalf of the supplier when he buys goods and services from unregistered dealers (known as reverse charge mechanism). This creates problems for small dealers since buyers are reluctant to pay when they are unable to claim input tax credit immediately. At the previous meeting of the Council, reverse charge provisions were deferred till March 31, 2018. However, as of now, the relief is only temporary potentially leaving small businesses at the mercy of large corporates post March 2018.

4. Invoice matching

Invoice matching (matching of individual invoices with returns) is another problematic area that needs to be addressed. Perhaps the Council could defer this till the GSTN stabilises so that reconciliation problems do not delay tax credits. E-way bills, meant to facilitate seamless inter-state transport of goods and eliminate corruption at border check posts, have been deferred for now; but given their centrality to facilitating quick and smooth movement of goods, must not fall prey to lobbying by unscrupulous elements.      

Any tax reform as complex as GST is bound to be a work in progress, at least for the first few years. An ideal GST should cover all sectors and have few rates. But what we have is a partial GST, many rates, and worse, frequent tweaks. But does that weaken it to such an extent that it takes away from all that GST stands for: viz a simpler tax regime, broader tax base, no tax cascades, enhanced export competitiveness, greater regional equity, and, most importantly, greater transparency? No! 

Provided we allow rates to stabilise and focus on improving the plumbing, viz the processes and technology backbone, even as we work to get the remaining sectors into GST, we would still have a better system, warts and all, than earlier.


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