Indirect tax is tied up in knots: What next?

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Abhishek Jain

The share of indirect taxes in India’s revenue kitty has always been significant. Even estimates given in the Budget 2019-20 are quite sizeable, especially with the implementation of GST (goods and services tax) and a likely higher tax compliance.

Seemingly, demonetisation increased the income tax base in India, leading to higher direct tax mop-up. Before GST, the Centre’s major chunk of revenue came from Customs and excise duty and service tax.

With implementation of the landmark tax reform in July 2017, there was a general expectation of greater tax compliance and related rise in government revenue.

The Economic Survey in 2018 bore testimony to this, with a 50 percent increase in the number of taxpayers under GST. The spurt was mainly attributed to voluntary registrations of small businesses to avail credit and continue the credit chain.

While there was buoyancy in the initial months, of late, indirect tax (read GST) has grown at a slower than expected pace. While the collection last month picked up, it failed to live up to the mark in preceding months, with the general slowdown seen as the real culprit.

To plug gaps and boost mobilisation, the government has taken a host of steps, including a legacy dispute resolution scheme for businesses in relation to potential liabilities, setting up of a committee to look into falling GST revenue, blocking the e-way Bill portal in case of non-compliance by businesses and curbs on availing of credit on invoices not uploaded by vendors.

Thanks to the above measures coupled with festive demand surge, November marked a rise in revenue collection, fuelling hopes of turnaround in fortunes.

While the committee on GST is yet to come up with its suggestions, implementation of the dispute resolution mechanism on the lines of the Sabka Vishwas Scheme for Customs might just work, which could boost revenue collections. Not just that, the resolution scheme would help resolve pending litigations, bringing a sense of tax certainty and promoting ease of doing business.

Additionally, an option to voluntarily discharge tax without interest and penalty could well be considered by the government for potential GST liabilities.

Given that many of these liabilities are linked to inadvertent errors and not mala fide intention, the government could consider a one-time dispute resolution mechanism, offering businesses a chance to set the house in order voluntarily with waiver of interest and penalty.

With the launch of a new returns framework and e-invoicing, the general expectation is GST collections will gather momentum. However, the government should provide flexibility, including phased implementation of these propositions and an option to manually handle discrepancies. The idea is to avoid any unwarranted business disruptions, specifically in the current state of affairs.

All the tax measures taken so far are expected to bear fruit. But the steps to address the slowdown in the economy, in my view, will play a pivotal role in shoring up indirect tax collections. The reason is simple. Tax revenues have a direct correlation to supplies from businesses.

Abhishek Jain is Tax Partner, EY India. Views are personal.