GST has dismantled inter-state trade barriers and converted India into a unified market of 1.3 billion citizens. With the government placing emphasis on curbing black money, GST can significantly complement this effort, being less intrusive, more self-policing, and hence a more effective way of reducing malpractices and rent-seeking.
Incentive schemes, devised as a tool to attract investment by state governments by granting tax exemptions, have been found unsuitable under GST, prompting the government to move to an alternate scheme in the form of cash refund. The Union government too has dispensed with the area-bases exemption schemes. This resulted in elimination of mushrooming exemptions, tax cascading and the tax induced distortions.
The GST revenue trend largely has been in line with the expectations. Indications of April-May’18 promise a monthly GST mop-up touching Rs 100,000 crore in the current fiscal year. The GDP’s GST dividend, estimated at 2%, appears a far-cry as things stand now; however, Q4FY18 and Q1FY19 figures indicate things could get better.
The elimination of the multi-layered indirect tax structure, introduction of uniform GST rates across the country and GST registration, which facilitates cross verification of income tax returns, have the potential for increasing compliance in the coming times. Invoice matching (still in nascent stage) has driven the parallel economy to join the national mainstream. Over 40 lakh new taxpayers have obtained registration under GST to avail benefit of input tax credit and to levy GST on supplies. The number of return filers and collections under income tax also have shown significant increase, of 26% and 17%, respectively.
Limitation in GSTN functionalities, poor IT connectivity and multiple return filing requirements have caused initial challenges for business and tax authorities. The government, with a view to address the apprehensions of the business, proactively relaxed the return filing process. However, this in turn necessitated suspension of credit matching and return validation process, which formed the fundamental pillar on which the GST roll-out plan was based.
Simple periodic filing procedure is an essential feature of any simple tax regime. The government has been quick to notice this deficiency; corrective actions are on the anvil, and it is expected that the revised, simpler filing process would be implemented towards the third quarter of the current fiscal year. Certainty is the cornerstone of a sound tax form. Divergence in views among Advance Ruling Authorities calls for suitable alternate mechanism. Leaving out genuine business expenditures (rent-a-cab, employee insurance, food and beverage, construction, etc) from input tax chain doesn’t augur well, especially as the stated objective is to remove tax cascading. Issuance of administrative instructions and circulars conflicting with statutory provisions and time-tested principles would dwindle the confidence of the business community. This requires urgent attention of the policy makers.
Follow-up actions are required to consolidate the gains and address the concerns of the stake-holders. Convergence of four-tier GST rate slabs into three by merging 12% and 18%, would help reduce dispute on classification, tax rate and check evasion. It is the appropriate time to examine the need of integrating petroleum and power sectors into GST. Energy, petroleum (transport fuel), construction and real estate, textile, fertiliser industries and exporters are reeling under inefficient input tax credit mechanism, archaic valuation rules, inverted tax rates, delayed refunds, etc, and that requires immediate attention.
The government deserves compliments for the bold initiative to introduce this much-delayed fiscal reform. Course-corrections would act as a catalyst in achieving the aspiration of taking India to the first 50 countries in ‘Ease of Doing Business’.
By Amit Sarkar, Partner & Head- Indirect Taxes, BDO India