India introduced the goods and service tax (GST) on July 1, 2017. It was a humongous task as 17 different tax jurisdictions, 16 different tax levies and 15 kinds of cess and surcharges under eight different constitutional entries were merged into one system.
Earlier, there were barriers, and movement of goods were restricted with different e-way bills and checkpoints across most of the country.
The unified GST replaced more than 100 different statutes governing value- added tax (VAT), entry tax, entertainment, luxury and advertisement taxes. Now, there are only two statutes -- one dealing with local supplies and the other with inter-state and international supplies.
Because of the single document for the movement of goods, the e-way bill, and because there are no checkposts, the turnaround time for goods vehicles has reduced by more than 50 percent and this has led to a reduction in the logistics cost.
Collection ecosystem widens
Monthly GST collection, which, in the first nine months was Rs 82,200 crore, has increased to Rs 1,50,800 crore during 2022-23 and further to Rs 1,72,000 crore in the first two months of the current fiscal.
One thing to note is how the collection ecosystem has widened. Regarding buoyancy of GST, during 2018-2023, it was 1.25, despite a series of rate cuts. The tax buoyancy in the pre-GST region was 0.998, a rise of more than 25 percent. This is according to a recent study by the Department of Revenue.
About the taxpayers' experience, there was a recent survey by a leading tax consultancy, which found that more than 94 percent of the industries surveyed expressed a positive sentiment towards the new tax regime, which includes 88 percent of the MSME sector as well.
Registered taxpayers were 65 lakh in the pre-GST regime, rising to 140 lakh now. There is a common portal of GSTN and it has brought the whole of India on a common platform and because of this, there is an ease-of-doing business and enhanced efficiency of business entities.
Why the Indian GST system is the best
This is only because of technology and the system is now handling more than 1 crore returns, 9 crore e-way bills, and 6 lakh large taxpayers are uploading 10 crore invoices every month. This is unheard of in any tax administration system across the globe.
I think it is one of the best GST systems in the entire world. Rahul Gandhi calls it the Gabbar Singh Tax but no Congress finance minister has ever raised any voice against GST in the GST Council and each and every decision till now has been taken unanimously, except one on lotteries.
In the last six years, after a detailed discussion, they have agreed on everything. So whatever statements they were issuing outside the Council, inside the Council, all the decisions are unanimous.
Challenges and decisions, going ahead
What are the issues now? Major issues are that unscrupulous elements enter the system and misuse credit across the country. Recent investigations have led to the unearthing of fake credit networks. This issue was also noticed in the European Union when I, as the chairman of the Empowered Committee, visited the EU. They were facing the issue of frauds during the first decade of the millennium. The biggest issue is this misuse.
The second phase of GST should focus on how to ensure the entry of only genuine businesses into the system. Now, they have decided there will be a physical verification before registration and thousands of fake registrations have been cancelled. Artificial intelligence and machine learning tools must be used to perform rigorous verification before granting registration.
Everything, be it tax liability or credit of business, should be auto-drafted. If there is mismatch in the invoices, it should be handled by the system. Everything should be largely automated. Revenue leakage is the biggest issue because of fake registration and misuse of credits. And now, there is no 14 percent revenue growth assured to the states. So, prevention of revenue leakage is very important.
The compensation cess will end before March 2026. Whatever revenues will be generated will be used to service the debt the government of India has taken.
During the pandemic, revenue was very less and there was not much revenue in the compensation cess kitty. At that time, the government took a huge loan to help the states. That cess has been extended to 2026. The council may take a call on merging the current cess with the regular tax on products, on which the same is levied.
So in stage 2, this will also be a big issue because over and above the 28 percent tax, compensation cess is being levied. After March 2026, it should be merged with the regular tax on products.
In the second stage, they should start deliberating on extending GST to petroleum products though it is very difficult because if they bring petroleum products under GST, states will have to incur huge losses.
Then there are issues like rate rationalisation and correction of inverted duty structure.
They were not raising rates because of inflation. Now inflation is under control, but still it will be difficult for states because elections are only eight months away.
So, it will become difficult for the GST Council to rationalise rates because of ensuing elections but they should start doing their homework. On some items, they can think about rationalising rates also.
The merger of slabs will be a financial decision. I don't think that, in the near future, they will be able to take a decision on these subjects because elections are very near. After elections, I think the GST Council can take a decision on rate rationalisation, minimising tax exemptions, and inverted duty structures, and they can tweak taxes here and there on some of the items which are very important.
(As told to Mrigank Dhaniwala)
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