Rationalising GST slabs should be priority, say stakeholders and experts

The implementation of GST brought together various taxes such as excise duty, service tax, value-added tax (VAT), and others under a single tax umbrella, reducing cascading effects and improving tax efficiency.

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This integration simplified compliance for businesses and reduced the compliance burden associated with multiple tax filings. The implementation of GST has undoubtedly facilitated ease of doing business and improved the competitiveness of Indian enterprises in both domestic and international markets. Small and medium enterprises (SMEs) faced difficulties in adapting to the new system, resulting in initial disruptions.

“The agenda of the government might be to expand the tax base by including more goods and services within the ambit of GST. This could involve revisiting the current exemptions and thresholds, and a wider coverage of economic activities. Over time, governments may work towards rationalising tax rates and reducing the number of tax slabs to simplify the system. This could involve a gradual shift towards fewer tax rates or even a single rate for certain categories,” Rajat Mohan, Senior Partner, AMRG & Associates, told Moneycontrol.

What are the reforms so far?

Over the years, the government has undertaken simplification measures and some reforms. The introduction of the simplified composition scheme, threshold limits, and quarterly return filings for small businesses are examples of such efforts.

“As India enters the next phase of GST, there are areas that require further attention and reforms. Rationalisation of tax rates, bringing more sectors under the GST ambit, simplifying the return filing process, and addressing the concerns of small businesses are some of the key focus areas. Additionally, strengthening the technological infrastructure and addressing compliance-related issues would be crucial to further enhancing the efficiency and effectiveness of the GST system,” Mohan said.

The authorities may continue to focus on improving compliance and leveraging technology for smoother tax administration. They could include the introduction of advanced systems for return filing, invoice matching, e-way bills, and data analytics to detect tax evasion. Governments may undertake sector-specific reforms to address specific challenges and promote growth. For example, they might consider reviewing tax rates or compliance requirements for sectors such as real estate, healthcare, education, and financial services, he added.

“However, reducing the number of slabs to remove complexity and rate arbitrage are the key reforms awaited. There needs to be a reduction in the number of rates. The Group of Ministers (GoM) on rate rationalisation has only submitted an interim report and the final report is still awaited. A robust dispute resolution body, Goods and Services Appellate Tribunal (GSTAT), is yet to be operationalised. Removal of inverted duty structure in respect of textiles and a few other commodities is also pending,” former Central Board of Indirect Taxes and Customs (CBIC) member Nagendra Kumar told Moneycontrol.

Removal of ambiguities

“Removing legal ambiguities to make the GST laws easy to comply with is a major pending reform. Inter-branch transfer of services  across states, such as cross charging of expenses, employee cost of head office-branch office transfers, disputes relating to deemed supply across distinct persons with neutral revenue implications, etc., need to be dealt with. The GSTC may like to examine these issues and provide clarity for both prospective and past periods to bring certainty on these contentious issues,” Kumar added.

“One of the burning concerns for taxpayers, industry-wide, that needs limpidity by lawmakers is the ambit of intermediary services and its taxability, given the complex and wide definition of intermediary under GST law,” Krishan Arora, Partner, Grant Thornton Bharat, told Moneycontrol.

The GST regime, which was introduced as ‘One nation, One Tax’, has proved to be a catalyst in streamlining India's comprehensive tax structure, replacing the complex web of indirect taxes.

“Easing Input Tax Credit (ITC) mechanism to ensure the smooth flow of credits and reduce complexities associated with matching invoices is much-needed. This can help businesses optimise working capital and reduce the burden of taxes.” Arora noted.

Strengthening IT Infrastructure

He added that strengthening of IT Infrastructure may include improving GST portal, enhancing data security, and providing user-friendly interfaces for taxpayers. “Developing a strong grievance redressal mechanism for taxpayers is also a way forward for reforms. Fostering a collaborative approach between the central and state tax authorities to address any issues or challenges that arise during GST implementation and ensuring consistent tax administration across the country will be useful,” Arora said.

Regarding the issue of states not receiving GST compensation anymore, it is essential to understand that it was supposed to be funded through the Compensation Cess levied on certain goods and services. But, due to various factors such as the economic slowdown and impact of COVID-19, the compensation requirements of states exceeded the available cess funds. As a result, some states have faced challenges in receiving their full compensation entitlement. The issue of pending compensation to states has been a point of contention between the state governments and the central government. Some states have expressed dissatisfaction and demanded immediate resolution of the compensation issue.

“The constitutionally guaranteed period of five years ended in June 2022 and unless another amendment is brought, compensation cannot continue. For those states whose revenue is negatively impacted continuously over the past six years, the Finance Commission could suggest measures by which funds could be transferred or grants-in-aid could be considered,” Kumar said.

Going ahead, increased compliance activities in the form of scrutiny and audit have led to a rise in the number of issues relating to procedural violations, and revenue- neutral objections, which are likely to raise disputes, a former revenue official said.

“While every effort is required to safeguard revenue, excessive actions without having sound legal backing could lead to uncertainties in businesses. The idea is to have a simple, good tax which is perceived to be fair and easy to comply with,” he added.