Decrypting the good, the bad & the way forward for Indian GST

One of the most fundamental indirect tax reforms since independence, the Goods & Services Tax (GST) is now poised to close three years of its implementation at the end of June in the midst of the global crisis due to the novel coronavirus, or COVID-19, pandemic.

In these years, while the government has tried to leave no stone unturned to make it a robust and efficient system, it is pertinent to note that till date, umpteen changes have been made in the statute and the rules governing it. These changes were either to simplify the procedures for the taxpayers or to overcome challenges posed by the technology failures or fraudulent persons making fake input tax credit (ITC) claims/refunds. No surprise that the GST law has had its fair share of supporters and critics. Here are some thoughts on these years:

The ‘good’ in GST Simplicity is the best thing about the GST. We are now concerned with just one law for goods and services instead of multiple state and central laws in the earlier tax regime. This has saved a substantial number of man hours and accordingly, reduced the cost of doing business.

Being a combined levy on both goods and services, GST has effectively buried disputes like whether a transaction is a sale of goods or provision of service. Entitlement to ITC throughout the supply chain, barring a handful of goods or services, has substantially reduced the cascading effect of taxes.

GST has also helped businesses in the organised sector to redesign their supply chain. They are now opting for more centralised operations. Thus, reducing their overall cost of operations, which was not possible under the earlier regime.

Since IT forms the backbone of the Indian GST and its compliance, the GST regime has standardised pan India procedures. This was only a distant dream under the earlier regime.

Digitisation of GST compliance is no less a blessing. The GSTN portal aids the taxpayers to directly register, file returns, make tax payments, file refund claims, etc without any direct interaction with tax authorities.

Novel concepts of e-way bill and e-invoicing are other giant steps that will eventually take us to a single annual return system with periodical payment of taxes, like we have for income tax.

IT has also played an important role in allowing the government to unearth frauds worth thousands of crores relating to fake ITC claims. This was happening even in the earlier regime but went unaddressed due to operational limitations. High-end algorithms used by GSTN portal and digitisation of pan India compliance data alone has made this possible.

The ‘could be better’ in the GST regime From an organised sector perspective, there is little to complain about in the GST formulation. However, we live in an imperfect world with many unorganised parts which are not digitally enabled. In my view, India is not yet IT ready for a reform of this significance and the same is true for the government as well.

In the last one decade, internet coverage has improved significantly in the country thanks to cheap data plans. Many parts of India continue to suffer due to the lack of basic infrastructure like electricity or skilled manpower. How a small enterprise or medium scale business with a factory at a remote location battling poor network connectivity, unreliable power and inadequately trained IT manpower is expected to file online, generate e-way bills or e-invoicing on a recurring basis is a moot question.

The government too is facing new challenges with GSTN every day. Till date all the functionalities of the GSTN have not been implemented for one or the other reason. Even now, any inadvertent mistake in the online filings or e-way bills can lead to undesirable consequences. Similarly, refunds for exporters have not yet been streamlined and the present fiscal deficit is only making things worse.

And the ugly in GST? Another major challenge are the stringent conditions that need to be fulfilled in order to avail input tax credit. These conditions, in my view, are arbitrary and impossible to comply with realistically.

Consider for example, the condition that the credit of GST paid on purchases can be availed only if the supplier has deposited tax with the government (Section 16 of the CGST Act). Likewise, the restrictions on full availing of ITC for those transactions which are not yet reported by the supplier (Rule 36(4) of the CGST Rules) should be eased. These have been relaxed temporarily to ease out liquidity on account of the COVID-19 crisis.

The idea behind the introduction of these stringent provisions was to rein in fake ITC claims. However, these curbs are affecting genuine taxpayers also. For example, small taxpayers (i.e. with turnover up to Rs 1.5 crore) are required to file GSTR-1 returns quarterly though the tax payment is required to be made on a monthly basis in the GSTR-3B form.

Now, if a large taxpayer procures any goods or services from a small taxpayer, then the large taxpayer cannot avail ITC for tax charged and deposited by the small taxpayer pending the filing of their GSTR-1. The same problems persist in the new GST returns system.

Restrictions like these are meaningless and arbitrary and they may well lead to a situation where no one will prefer buying goods or services from small businesses. Multiple writs are already pending in the courts on these issues.

The mechanisms under National Anti-Profiteering Authority (NAA) and the Authority for Advance Rulings (AAR) are also not functioning as expected. NAA orders are being taken to the courts in almost every case on account of the arbitrary approach adopted in decisions. And the AAR rulings which were meant to clarify issues have only created confusion and increased the trust deficit in the mind of taxpayers.

State specific incentives are another sore point. Manufacturers, who had set-up factories in particular states, were allowed under the previous regime a refund of a certain percentage of the Value Added Tax or Central Sales Tax (VAT/CST). These incentives, of course, lead to massive growth in a few states.

In the GST regime, however, inter-state transactions attract the integrated GST (or IGST), which is shared between the Centre and the destination states. However, the state of origin, where the manufacturing supplier is located, does not get much. Therefore, such states have either discontinued these incentives or modified them substantially to less attractive options. This too has resulted in unwarranted litigation.

Way forward into the 4th year In my view, had the Ssates and Centre contemplated some of these knotty issues before introducing GST, transition to this new regime would have been much smoother. Going forward, changes on the compliance front should be kept to a minimum as there is a cost of implementing these changes time and again.

I see no reasons why the government has resorted to restriction of availing of ITC in the absence of documents to 10 percent of eligible credit under Rules 36(4) of the CGST Rules for the entire industry. This provision is prone to constitutional challenges and writs have already been filed in the courts.

In addition, it is important that the pending refunds should be processed in a time-bound manner, at least when the entire industry is undergoing a liquidity crisis. Instead of offering bridge loans to the industry against hefty interest rates, the government should consider faster refunds for pending claims.

Existing dispute resolution mechanisms and the AAR process needs to be strengthened further.

In order to overcome the ongoing COVID-19 crisis and to boost local manufacturing, the government should take major steps to promote Make in India. To begin with, India should increase customs duties on selected goods including their major components where there is potential for local value addition. India should also incentivise companies who set-up industries in India for both local and global markets by providing capital subsidies and export incentives in accordance with WTO norms.

However, it is advisable that the government should resort to these suggestions in phases by adopting the model used in the mobile handset segment wherein it first created a huge arbitrage opportunity for local manufacturers vis-à-vis imports, and then eventually increase duty rates on key components as well.

This gives time to key players to shift operations to India over a period of time without affecting their operations. I see huge potential in segments like pharmaceutical, electronic and toys where our dependence on China is quite high.

A chartered accountant by qualification, Sanjay Jain is Senior Consultant in the areas of tax, litigation, contracts, finance and insurance. He has been working for over 26 years with IT services, solutions and distribution company, HCL Infosystems.