Relaxing certain GST provisions is the need of the hour

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As the clock struck midnight on July 1, 2017, Parliament ushered in to adopt the biggest tax reform — the Goods and Services Tax (GST) regime. This huge task that involved replacing at least 17 state and federal levies was introduced with the intent of making the movement of goods cheaper.

Corporate India was overjoyed by the prospect of one indirect tax regime compared to the central excise and multiple state VATs and local taxes they were grappling with. The GST today has undergone through a four-year journey and there are many sectors that need to have a serious relook on both rates as well as manner of implementation as these seem to impact businesses. They may also have an existential effect on startups across certain sectors.

The COVID-19 second wave resulted in further slowdown for startups that were just beginning to recuperate and revive from the impact that the first wave left on them. Despite good attention from the government, there are many sectors that have suffered due to the GST applicability in a manner that has eroded their working capital. Therefore, there is a definitive need now to ensure that corrective actions are taken to remove certain anomalies.

Let’s have a closer look into few of sectors that need immediate corrections.

Travel

Online Travel Aggregators (OTAs) and startups in this space had ease of compliance during the service tax regime and expected further relief with the advent of the GST regime. But on the contrary, they were burdened with many additional compliances. For instance, an OTA despite being an online portal or an app is now required to obtain GST registrations in every state where their customer or supplier exists. Also, while they should have ideally operated from one office, today they have to have physical offices in all 36 states and UTs, file some 108-odd returns monthly over and above the annual GST return for each state.

This not only increases operational costs due to multiple unwarranted physical offices but also increases administrative costs and gives an unfair advantage to operators offering the same services but located outside India. It is time for a review and rationalisation of the GST applicable across different aspects of the tourism, travel and hospitality industry.

Electric Vehicles

The government is pushing for all round encouragement for EV adoption. However, there is lack of uniformity of the GST on EVs, batteries, and charging-swapping station services. Trying to address the inverted GST structure, the Ministry of Road Transport and Highways allowed the sale of batteries outside EVs for viability purposes which encouraged battery swap options. However, a GST rate of 5 percent when the battery is sold with vehicle but 18 percent on batteries sold separately leads to an increased cost and makes battery swap models costlier due to an additional 18 percent levied on services as well. Ideally, all batteries, irrespective of inside or outside, plus swap services should have a GST of 5 percent to make this market viable.

Insurance

The pandemic has suddenly driven a realisation for investing in protective and pure insurance products. Currently, pure insurance products attract an 18 percent GST. In simpler words, for every Rs 100 invested there is an additional cost of Rs 18 which is infructuous for the investor as an investment and acts as a disincentive for insurance penetration. Preferably, the GST should not have been applied on pure insurance products as this is an important social security cover.

Textiles

The government and the GST council have always strived at making essentials cheaper for the end consumer, and it has levied a minimal GST of 5 percent on clothing items below Rs 1,000. However, for any startup business in the textile industry, it would need to invest in value added services such as marketing, warehouse rentals, logistics, courier, and other product fulfilment costs — and these attract a GST of 18 percent. These higher input GST costs don’t get absorbed in output GST as these startups operate on a low margin. For small and emerging startups, the input GST accumulation typically to the tune of 2 percent of revenue. This essentially means overpaid input GST, resulting in working capital sitting as GST but unusable.

Restaurants

The GST on food at restaurants was kept at a lower rate of 5 percent with no input tax credit. This greatly reduced compliances for the small operators and resulted in infructuous GST payments for those procuring raw materials from established businesses which attracted GST. Hence, such sectors should be given options to opt for a higher GST tax slab with input tax credit being allowed, which will benefit the organised sector in this space.

The need of the hour is to provide relief measures to these and many such sectors that will help the industry recuperate from the pandemic’s impact in an easier manner.