The good, poor, and ugly of four years of GST
P Thiaga Rajan, the Finance Minister of Tamil Nadu, created a debate when he suggested that the GST’s implementation was flawed and that it needed to be re-tooled and restructured. “Sensible people may agree or disagree on a design or system or platform, but logic says you keep re-evaluating based on the outcomes. Have you achieved the goals you wanted? Have you avoided the failures you feared? If the answer to both those is ‘no,’ logical people would say ‘re-tool, re-structure’,” Rajan made the remarks while speaking at a virtual gathering on ‘Tamil Nadu: The Road Ahead’ hosted by the IIM-B Alumni Association, Chennai Chapter. Even its most ardent supporters acknowledge that the GST regime is still a work in progress and that numerous structural improvements are required for a more stable and hassle-free system as the GST regime approaches its four-year anniversary this week.
Good intentions, but tainted by technical faults and design flaws.
The GST was introduced as one of the most significant economic reforms by the BJP-led Modi government, with the promise of simplifying taxation and reducing compliance burdens. Experts also claimed that it has expedited the procedure in numerous ways. “Based on the one nation one tax ideology, GST has helped in reducing the cascading effect of tax considerably. Also, multiplicity of compliances under various indirect taxes has been reduced. Hence, introduction of GST in India has brought in efficiencies in indirect tax compliance, incidence and reduced the number of indirect tax authorities that a taxpayer needed to interact with,” said by one expert.
The concept of e-invoicing, which aims to promote greater openness in supplier-receiver transactions, is also a benefit. The introduction of the e-way bill, combined with a crackdown on bogus invoicing, has aided in the collection of a significant amount of GST revenues that had been either evaded or under-reported. However, technical difficulties, difficulty obtaining input tax credits, and constantly changing rules make compliance a challenging task. However, technical difficulties, difficulty obtaining input tax credits, and constantly changing rules make compliance a challenging task. “Input Tax Credit (ITC) is an area which has certain limitations that need to be addressed. The GST regime sought to have a seamless flow of ITC, however, conditions for availing ITC being stringent, many taxpayers lost out on ITC. Also, taxpayers lose their ITC due to non-reporting or mistakes by their suppliers,” said by one expert.
Aside from that, taxpayers are displeased with Rule 36(4), which imposes an arbitrary monetary restriction on the amount of input tax credit that can be claimed and requires a specific percentage of GST to be paid in cash. Even the most honest taxpayers are finding it impossible to comply with these requirements. Former finance minister Arun Jaitley pledged in the early years of the GST rollout that the tax slabs will be reduced to three by merging the 12% and 18% slabs. However, after so many years, it remains a faraway reality. Falling revenue combined with disruptions brought on by the Covid-19 outbreak has caused the reform to be repeatedly postponed, leaving a huge number of items in high tax brackets. Due to a lack of clarity on numerous rules, there has been a lot of litigation and differing interpretations (of the same legislation) by Advanced Ruling Authorities around the country.
“The government needs to establish GST Tribunals to reduce litigation timelines and the pressure on courts. The state authorities for Advance Ruling should ideally also have an independent jurist member, apart from a representative from the tax department,” Expert Suggested. When the states agreed to implement the GST, they knew they would have to give up a portion of their tax revenue. However, for the first five years after the implementation of GST, the Centre promised to compensate the state with revenue lost.
Read Also: Recommendations of 44th GST Council Meeting
The nationwide lockdown, on the other hand, exacerbated the problem of state revenue shortfalls, as the Centre failed to pay its dues on time. States are also becoming dissatisfied with the system as their coffers dry up and their social and health-care spending rises. “We knew we were losing our independence of taxation as States. Already all direct taxation was Centre, the indirect was partially with us and the Centre. We went in with a lot of trepidation and fear and some hope of outcomes that would give long term and widespread benefit,” Rajan said, Five years later, worries have risen dramatically, but advantages have still to be realised by 20-30%. This encapsulates the dissatisfaction felt by many states.
Meanwhile, if recent instances are any indication, GST Council meetings are not as often as they once were, and they frequently result in dispute, fights, and harsh letters and declarations. States have also accused the federal government of monopolising a significant share of tax revenue in the form of cess. The GST Council borrowed 1.1 lakh crore last year to compensate the states to make up for the gap. The Centre expects to pay the remaining 63,000 crore this year.
The journey is about to begin. The opposition-controlled state governments are likely to seek an extension of GST compensation on their revenues beyond June 2022, when the five-year timeframe expires, as the GST council is expected to convene soon to deliberate on this year’s compensation. In its most recent report, the Fifteenth Finance Commission addressed a number of issues, including a large shortfall in collections compared to the original forecast, high volatility in collections, the accumulation of large integrated GST credits, glitches in invoice and input tax matching, and refund delays. The Commission also expressed worry about states’ continued reliance on compensation from the federal government to make up for revenue shortfalls. At the same time, it was urged that the structural consequences of GST for low-consumption states should be taken into account.
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