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GST at 5: A structural, economic analysis and prescriptions

The three-tax structure of GST -- integrated, central and state -- with a requirement to register and pay each in every state of operation has made GST complex, more so for mid-sized and small businesses.

June 27, 2022 / 10:10 AM IST
Representative image

Representative image

It has been almost five years since the Goods and Services Tax (GST) was introduced in India and it is now time to review whether one of the country’s most transformational tax reforms since Independence has delivered on its promise and if the economic rationale behind moving to GST is yielding the expected benefits for both the government and business.

The concept of subsuming existing central and state taxes into GST was very novel and the resultant three-tax structure (Integrated GST, Central GST and State GST) instead of a multiplicity of levies, was a significant improvement over the earlier indirect tax regime.

However, this three-tax structure has led to a lack of fungibility of Input Tax Credit (ITCs) for businesses with operations in more than one state. While SGST credits cannot be used for payment of either IGST or CGST even within the same state, there is a specified sequence for using IGST credits for payment of CGST and SGST.

Any of the GST tax credits in one state cannot be used for payment of a similar tax in another state. The three-tax structure of GST with a requirement to register and pay each of the three taxes in every state of operation without fungibility across states, has made it essential for all businesses to maintain separate state-wise records which makes GST complex, more so for mid-sized and small businesses. The attendant complexity makes it necessary for businesses to have more reconciliations, record keeping and automation efforts, which lead to increased costs for businesses.

Equally, the requirement of vendors to pay GST and fulfil their compliance requirements in order to entitle buyers to take the ITC does create an additional workflow requirement for all businesses, both from accounting and tax perspectives. While there was some leeway in the past for taking unmatched credits, it has been completely done away with now, putting businesses that have non-compliant vendors at a disadvantage, despite their own compliances and payments being spotless.

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In the present situation where many businesses have been handicapped by working capital shortages due to elongated payment cycles from customers, the above structure imposes significant a funding burden due to:

a)    The inability to adjust ITC across states and in some cases across taxes in a particular state.

b)    The requirement that the vendor is compliant with tax payment and return filing.

logo-GST-at-5-1From an economic standpoint, for manufacturers, the GST has resulted in a lower indirect tax cost on their products as the rates for most products are significantly lower than the combined impact of the erstwhile Excise Duty and Value- Added Tax. For service providers, there has been an increase in the rate from 15% to 18%. However, their ITC basket has expanded in GST, leading to a lower actual increase. For the government, while there were revenue challenges during the initial period, the past few months have seen increased GST revenue in the backdrop of several macro-economic parameters seeing an upswing.

The larger issue from an economic standpoint would be whether GST has resulted in an expansion of the tax base as that is the only long-term method to have stable and lower rates across products and services.

Since GST registration numbers are based on the Permanent Account Number, there has been a steady increase in both PAN applications and in GST registrations. Income tax collections have risen and possibly some part of that buoyancy can be attributed to the gradual shift in taxpayer behaviour due to the realisation that compliance from both direct and indirect tax perspectives is now essential as they are interlinked.

Also read: GST at 5: Accountants still confront major issues in filing returns

As we move on to the next five years of GST and beyond, it is necessary to focus on the following five areas, keeping in mind that GST reforms represent an ongoing process and should not be considered a singular event.

1. Rationalise the rates under GST and bring them to a maximum of three rates covering essentials, comforts, and luxuries.

2. Move away from levy of compensation cess as soon as revenue considerations permit it.

3. Include petroleum products in a phased manner under GST, bringing in natural gas and aviation turbine fuel initially, and then eventually including petrol and diesel.

4. Move to a simpler compliance regime with fewer returns, especially for service providers.

5. Enable fungibility of ITC across states to realise the “one nation, one tax’ vision.

The reform process in these areas over the next few years will significantly improve the rankings in the Ease of Doing Business parameters and would enable GST reforms to move to the next level of a truly nationwide and simple tax.

M.S. Mani is a Partner with Deloitte India. The views expressed are the personal views of the author.
M.S. Mani is a Partner with Deloitte India
first published: Jun 27, 2022 09:37 am
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