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Why GST needs a seamless tax credit mechanism


06 July 2018

The Goods and Services Tax (GST) - billed as the country’s biggest post-independence tax reform, was rolled out in a midnight ceremony in Parliament on July 1, 2017. GST subsumed multiple indirect taxes levied by the Union and State governments with an objective to unite the country of 1.3 billion citizens spread over 29 States and 7 Union territories under the slogan “one nation, one tax”. The tax was expected to transform the way business is being carried-out in India and help the government mop-up more revenue by widening the tax-net and curbing a thriving parallel economy.

GST empowered the Union and State governments to levy tax on a comprehensive base of goods and services, on the trigger event of ‘supply’ of goods or services. It also sought to eliminate cascading effect of tax prevalent historically, owing to truncated or partial application of the Centre and state taxes. Primacy of GST Council represents a shining example of how the Union and state governments can work closely in matters concerning fiscal reforms and nation building. Though the anticipated benefits of GST are yet to emerge, early signs in the one-year period have been encouraging. Much more needs to be done to reap the real rewards. 

The GST revenue trend has been nearly in line with the expectations and indications of April-May’18 promises - a monthly GST mop-up of close to Rs1 lakh crore  as we reach fiscal year end.

Anticipated additional GDP growth up to 2% appears to be a far-cry as it stands now; nevertheless, it is expected that GST would help cover the lost ground in 2018-19 and the tangible benefits would begin to show-up. Unhealthy competition among states to woo investment had resulted in mushrooming exemptions to weaken supply chain efficiency and increased tax ‘costs’; the alternate mechanism in the form of budget-supported cash refund mechanism would act as a remedy to the malady. Seamless tax credit mechanism would reduce cascading effect of tax.

Invoice matching (still in nascent stage) have driven the parallel economy to join the national mainstream. 

An easier return filing process is an essential feature of a simple tax structure. Divergence in views among Advance Ruling Authorities calls for suitable alternate mechanism to build confidence. Restriction on input tax credit on genuine business expenditures (rent-a-cab, employee insurance, food and beverage, construction, etc.) appears to be a hang-over of the past and goes against the stated objective of removing tax cascading. 

The government may desist from issuing administrative instructions and circulars which run counter to the time-tested principles of settled tax laws (eg. customs law). 

The government may focus its attention to progressively converge four-tier GST rate slabs into three by merging 12% and 18%. 

The petroleum and power sectors deserve to be integrated into GST. 


  • Unhealthy competition among states to woo investment had resulted in mushrooming exemptions to weaken supply chain  
  • Energy, petroleum, construction and real estate, and exporters are adversely impacted due to inefficient tax credit

The writer is Partner & Head - Indirect Taxes, BDO India