On July 1, 2017, history was created when the country witnessed the biggest and most important economic reform since Independence—the goods and services tax (GST). The reform that took more than a decade of intense debate was finally implemented subsuming almost all indirect taxes at the Central and state levels.
The GST, termed as ‘one nation, one tax’ by the NDA Government led by Prime Minister Narendra Modi, aims to provide a simplified, single tax regime in line with the tax framework applicable across the globe. The GST provides a four-tier rate structure for goods and services, which is based on the principle of ‘equivalence’ and aims to ensure that different economic classes are not subject to tax at the same rate.
With the first anniversary of this landmark reform approaching, it is worthwhile to reflect back on 365 days of the GST journey and see what worked in favour of the government and India Inc., what did not go so well and what are the improvements required to make the GST ‘a real success’ for the economy.
What worked
The GST has certainly reduced multiplicity of taxes and has thus created a simplified tax regime to promote ease of doing business. From a macroeconomic perspective, the government and industry expected the GST would be instrumental in reducing economic distortions, which in turn, would provide necessary impetus to economic growth.
The Economic Survey predicted India’s GDP growth to be between 6.5% and 6.75% in 2017-18 compared to 7.1% in 2016-17. The marginal reduction in the initial phase of GST implementation was expected, given the scale of changes in business and tax administration that the GST brought. However, this decline is expected to be temporary and GDP is projected to grow back in the range of 7% to 7.5% in 2018-19 primarily due to the implementation of the tax.
The Index of Industrial Production (IIP), a lead indicator of industrial activity based on monthly production data from select manufacturing units, showed average growth of 5% from July 2017 to January 2018.This was higher than the 3.9% growth registered between July 2016 and January 2017, and is a positive sign.
Revenue collections surpassed the Rs1 lakh crore-mark for the first time in April 2018. The total number of companies registered between July 2017 and February 2018 is 68,299 compared to 63,106 in the corresponding period of the previous year. Therefore, the increasing trend of number of companies being registered has been maintained following the implementation of theGST.
Moreover, the GST has revamped the way business was done till its implementation. Manycompanies used this opportunity to create value for their businesses across procurement, manufacturing, distribution, and logistics.
The challenges
Undoubtedly, periodic compliance required under the GST regime presented its share of challenges. In this period, compliance-related experiences with the GST haven’t been smooth and the government had a daunting task of updating various functionalities ever since the GST portal was made operational in July 2017.
Industry expected a simplified compliance mechanism, but contrary to expectations, it experienced significant issues with the GSTN (GST Network) system. The typical problems experienced by taxpayers include difficulty in accessing the GSTN system, slow response rate of the system and error resolution mechanism, and absence of any functionality to rectify inadvertent errors in the returns. These bottlenecks resulted in repeated extensions of due dates for compliances, which increased concern amongst taxpayers.
After 365 days of a roller-coaster ride, some of the technical challenges have been fixed such as amendment of past period information, electronic filing of letters of undertaking, and automatic adjustment of tax liability with credit or cash. However, some issues such as a slow response rate and errors faced around due dates for filing of returns still remain and should be rectified on top priority.
There was a similar experience during the introduction of the E-Way Bill system in February 2018, due to which the launch of the provision got deferred. After the initial deferment, the government managed to roll out the E-Way Bill system from April 1, 2018 to track movement of goods on inter-state and intra-state highways. The experience of slow response rate of the GSTN portal, prompted the government to introduce E-Way Bills for intra-state movement of goods in a staggered manner by the quarter ending on June 30, 2018.
At the time of introduction of the GST, the government proposed a matching concept to claim input tax credit, which formed the backbone of online tax compliances. Due to technical challenges, the matching concept could not take off at all. As a consequence, the dealers are facing problems relating to artificial claims of input tax credit, which is leading to unnecessary litigation.
Refunds under the GST have been another concern area for the industry. The government strongly promoted GST as a tax regime with complete digitalisation. This regime was expected to offer traders a friendly tax environment, no or limited interaction with tax department officials, and speedy processing of refunds, thereby improving ease of doing business in India. Unfortunately, that remained on paper, and in reality many exporters were unable to file refunds for input tax credit. As a result, their funds remained blocked in the initial months. Realising the agony of the exporter community, the government organised a ‘Special Refund Fortnight Drive’ in June 2018, during which Central and state GST officers have been instructed to expeditiously clear pending applications for GST refunds.
The introduction of anti-profiteering provisions, in line with Australian GST regulations, which entail passing of the GST benefit to end customers through commensurate reduction in price of goods and services, has its own challenges.There are no clear guidelines on the granularity of data to be used for computation of revised prices (whether at entity level or product level or SKU level). Some critics maintain that the introduction of such provisions is an attempt to regulate prices—a practice that has no place in a free economy. In their opinion, market forces shouldensure that prices remain competitive.
The road ahead
The main idea behind the implementation of the GST was to levy a single tax on all goods and services, resulting in free flow of credit in the economy. However, at present, certain products such as petroleum products (including petrol, diesel, airline turbine fuel, and natural gas), alcohol and immoveable property are outside the GST net. This is, in effect, defeating the government’s purpose of implementing the new regime. It is expected that there may be an intense debate on expanding the GST base by bringing these products within its ambit in 2018-19.
As far as compliances are concerned, the government has made a proposal to consolidate all periodical returns into a single return. The government machinery is already working on the new format and necessary IT-related changes to make this effective in the next six to eight months. Taxpayers will need to be prepared to adapt to this change as and when it is implemented. Another item on the government’s priority list for the coming year should be further pruning of GST rates.
One of the key objectives of the GST was to ensure a seamless flow of input tax credits. Keeping this in view, it is expected that measures to facilitate liberalisation of credit will be implemented and most credit blockages, provided for in the current law, will be done away with. Industry is expecting that these issues with the law will be looked into and hopefully addressed by the second anniversary of the GST.
To conclude, as the GST journey progressed, the government has been proactive in resolving issues faced by India Inc. either through notifications, circulars, FAQs or an official Twitter response. While still there are gaps between expectations of India Inc. and actual implementation of the GST in terms of a simplified tax structure, ease of doing business and overall reduction in prices, there seems to be an overall positive impact in terms of macroeconomic growth and digitalisation.
In future, stabilisation of the GSTN portal and removal of uncertainties to facilitate ease of doing business will be the key to the success of GST implementation in India. In addition, as we go along, the government should focus on structuring of the tax administration. The process of issuing notifications needs to be streamlined in order to give organisations ample time to adapt to changes required without any disruption of business. The government should also take measures to ensure consistency in the approach followed by tax officers across jurisdictions.
(Views expressed are personal.)
The author is a partner, indirect tax, PwC India with additional inputs by Kishore Kumar, director, indirect tax, PwC.