In this podcast, we dig deeper into how the GST has worked out for the country thus far.
Harish Puppala | Rakesh Sharma
GST is now over 18 months old. So how is GST doing in January 2019? With the elections just a few months away, now is as good a time as any to take a look at the eighteen-month-old toddler they call GST. Sure, there have been tumbles, but will this toddler be able to hold on his own and soon, are the questions we will examine on this edition of Digging Deeper with Moneycontrol with me Rakesh Sharma.
A brief history of GST
GST, the Goods and Services tax, was implemented on July 1, 2017. The government claimed it was revolutionary, and all businesses would benefit from it. The truth was far more complex. The perception we carried, especially in the initial days of the rollout, was that some things became cheaper because of just one countrywide tax while certain other things became more expensive, thanks to the different rate slabs that ranged from 5% to a huge 28%.
We need to understand what GST means to you, I and every other individual in this country. To paraphrase the explainer from Kotak Bank, we earlier paid a "tax on tax" for every purchase that we made “throughout the value chain.” This not only increased the taxes we paid to a pretty high rate - roughly 25-30%. Consequently, the end cost of goods and services were pretty high as well.
As Livemint noted, “GST replaced 17 central and state taxes that existed before and has led to the removal of check posts at state borders, transforming India into a single market.” The Goods and Services Tax is, at its core, a single tax on the supply of goods and services - right from the manufacturer to the end consumer. Its purported aim was to remove unpredictability and bring equality in the prices of products across the country. It eventually hopes to reduce the manufacturing cost of businesses, and to create a unified and streamlined market where the cost of goods and services will be more even across the country.
What that means in understandable terms for you and I is, GST was structured such that essential services and food items were placed in the lower tax brackets while luxury services and products have been placed in the higher tax bracket. So yeah, the Macbook or the Michael Kors bag ain’t getting much cheaper. Given the government’s moves to curtail the discounts offered by e-commerce companies, you might as well buy desi.
The absolutely necessary items for daily life - fruits and vegetables, milk, buttermilk, curd, natural honey, flour, besan, bread, salt, jaggery, cereal grains, fresh meat, fish, chicken, eggs are exempt from GST. As are, I kid you not, bindi, sindoor, kajal, bangles, drawing and coloring books, stamps, judicial papers, printed books, newspapers, jute and handloom, hotels and lodges with tariff below INR 1000 etc. Because, let’s face it, GST on bindi and sindoor would be ridiculous. You can just picture a bollywood film scene where the newly widowed sister of the hero wipes off her sindoor in utter grief, and you’re thinking, “ab GST bhi nahi bharna padega.”
Anyway, GST was meant to be the solution to VAT, or Value Added Tax, which was applied at different rates in different states. Yes, I know, taxes are named very creatively. As Bloomberg noted, “When a country...the size of India, with its multi-party federal structure, with both the centre and states having their own fiscal autonomy, looks to introduce GST, it was a given that the design (would) be India specific with basic principles borrowed from other Value Added Tax/GST laws.” What that meant was that GST was the the biggest tax reform to be implemented in independent India.
Vivek Tiwari, MD and CEO at Satya Microcapital Ltd, wrote in YourStory.com that GST “has streamlined the country’s indirect taxation system, underlining its promise of a unified domestic system of indirect taxes. Its impact on the economy and various sectors have been largely positive, barring some initial teething problems that are only expected with a reform undertaken on such a large scale. Nevertheless, the impact of the reform on the services sector, specifically the financial services sector, has also been significant.”
Tiwari lists out what he sees as the main advantages of GST: eliminating the cascading effect of tax; raising the threshold for registrations to 20 lakhs (The exemption limit is the threshold of annual turnover above which companies have to mandatorily register under the GST regime.); small businesses benefitting from composition scheme; compliance made simpler due to online procedures etc. GST increased the number of taxpayers to 3.4 million, according to the Economic Survey 2017-18. The increase in this tax base will help the exchequer with higher receipts when economic growth quickens.
While that presents the positive side of the GST picture, there has been definite blowback faced by the government. Even now, a large part of the economy—fuels, electricity, land and real estate excluding construction contracts - is still outside GST. One of the criticisms from the Congress party is that GST has multiple tax slabs, the highest slab is 28% against a cap of 18% that the UPA had proposed. The NDA government countered this saying GST has brought down the tax rate on 97.5% of commodities to 18% or less, as against an effective rate of 31% on most of the items in the pre-GST era. The opposition also alleges that the GST regime was rolled out in haste, without adequate preparation, resulting in hardship for traders across the country. This resulted in blowback, as we mentioned earlier. Rahul Gandhi famously calls GST Gabbar Singh Tax. Which is surprising, since the UPA government was mulling over the GST for ages. This week, during his tour of the UAE, he said, “We will take some rational economic decisions. We will restructure the GST and we will embrace investments from the Middle East and other parts of the world.” Gandhi claimed foreign investment was at a multi-year low in India due to the “ill-advised and badly thought out economic moves” such as demonetisation and a “poorly designed GST”.
Let’s examine Mr Gandhi’s claim. Between April and June 2018, foreign investors withdrew ₹61000 crores from India’s capital markets. Renewed confidence in the economy resulted in back-to-back monthly inflows of ₹2300 crores in July and ₹5200 crores in August of 2018. That particular rebound came after improved macro-economic growth indicators and corporate earnings as well as a positive report from the IMF in early August. Business Today, in its year end review a few weeks ago, noted that in FY16, FDI inflow was $55.56 billion while the next year saw FDI growth slow to 8.38%, clocking in at $60.22 billion. In FY18, said the paper, total FDI inflow was $60.97 billion with the growth dropping further to 1.24%. So even as there was growth in absolute numbers, the rate of growth has fallen for two years consecutively.
The Economic Times reported on December 28, 2018 that, according to data from Dealogic, a global M&A and capital markets data provider, India’s foreign direct investment was the highest ever with 235 deals amounting to $37.76 billion in the last calendar year. Kalpana Morparia, chief executive for South and Southeast Asia at JP Morgan Chase & Co, told ET, “India has had a busy M&A calendar in 2018 and we will continue to see good traction in inbound M&As.”
One analysis in BloombergQuint claimed that “At the very outset it was clear that...lawmakers and GST Council drafted a law, a rate structure and a base that was far from ideal. The objective was to implement GST first, and then tweak it periodically, basis feedback and improve the structure as we go along.” The report adds, “This is evident from the fact that the GST Council in the last 18 months has met 31 times and taken successful decisions through consensus. The GST Council as a constitutional body has had unparalleled success which many were sceptical about, and due credit goes to the Finance Minister of the Union of India and all State Finance/ Revenue ministers besides the untiring efforts of the GST working committee.”
The changes, or updates, to the GST over its 18-month life have largely been in the areas of rate rationalisation (the cursed 28% slab), ease of compliance, and improvements through changes in the Acts and rules. The improvement in the ease of compliance has been a pleasant surprise – GST attempted monthly reporting at transaction level with invoice matching, which was a big change from the summary reporting - monthly, quarterly, bi-annual - in previous central and state laws. It was also the area that saw many hurdles. It was a shift so substantial that companies had to spend significant time and money in upgrading their ERP systems in order to be able to comply with GST. It now appears that the government might have miscalculated how much of a shift this would prove to be. The first three months of GST were, to put it delicately, very painful. Stakeholders, especially taxpayers, faced near chaos in those initial months of implementation - chaos that resulted in course corrections and the introduction of GSTR3B summary monthly reporting and filing of only the GSTR1 form instead of the planned GSTR1, GSTR2, GSTR2A and GSTR3 along with invoice matching every month.
How does GST benefit me?
We benefit via GST rate cuts. Transparency in GST’s computation has made the high incidence of indirect tax on many daily use items apparent, which has prompted the GST Council to cut tax rates. The council estimates that the rate cuts announced so far amount to a benefit of ₹80,000 crore a year. That said, the issue of businesses not passing on GST rate cut benefits to consumers continues to be a problem. For example, many consumers have filed complaints which are being examined by the National Anti-profiteering Authority.
GST collections, or the lack thereof
Now we come to important matter of collections. GST has been at the receiving end of no small amount of derision, especially when it came to collections. How is that working out for the centre?
Livemint reported last week that the monthly run rate of collections until November was less than ₹90,000 crore, much lower than the monthly average of ₹1.05 trillion required to meet the annual target. Business Standard reported that the centre had collected Rs 94,726 crore as GST in December. As far as annual targets of GST go, the expected income was Rs 6.04 lakh crore from the Central GST in 2018-19. Business Standard claims CGST revenue stands at Rs 3.41 lakh crore in nine months (i.e, April-to-December), or 56% of the annual target. That puts pressure on the government - it needs to make Rs 87,000 crore in January, February and March to make up for the shortfall. That includes tax collected as CGST as well as settlement towards CGST from the IGST account. The worry for the government is that the highest inflow as CGST was recorded in July 2018 - Rs 58,796 crore. It also has another headache - evasion.
Shiv Pratap Shukla, minister of state for finance, shared data in Parliament on january 4 that showed the percentage of eligible taxpayers who avoided filing returns rose sharply. A year ago, 84.4 million hadn’t filed returns; this has risen to 283.1 million.
Coming to monthly numbers, here are the figures for GST collections: In April 2018, collections were at 1,03,459 crores. That dropped to just over 94,000 crores in May. It went up to 95,610 crores in June, and 96,483 crores in July. It dropped below 95,000 crores the next two months but bounced back to register collection of over 1 lakh crore in October 2018. It dropped top 97,637 crores in November and 94,726 crores in December.
You’re probably thinking at this point, what’s with the fluctuations?
E-way bills didn’t quite prove to be the panacea they were expected to become. When e-way bills were implemented in April 2018, it was expected that lower effective taxes, along with increased compliance, would accelerate formalization, and organized businesses would gain share and tax collections would surge. But it seems now looks as if the mechanism has failed to yield the desired results. For instance, when analysts from JM Financial Institutional Equities visited Haryana’s Yamunanagar - where 550-600 plywood manufacturing units are located - they reported that while invoicing levels increased, e-way bill implementation was still not strict in most places and companies were able to get away with under-invoicing.
MS Mani, partner, Deloitte India, said, “...collections, while admittedly below the targets, seem to indicate the revenue is stabilising at around Rs 95,000 crore a month, despite the rate reductions in the current fiscal year. A lower revenue than the target could lead to more compliance pressures on businesses and more focus on anti-evasion measures.”
One expert told Livemint, “Our understanding is that people are still gaming the system and this has to do with input credit...these companies are claiming input credit by showing estimates of their sales in the GSTR-1 form, as you just have to give details of your sales in this form and not show the actual invoices based on which the input credit is being availed. Later, they avoid paying GST, as payment of taxes happens when you file the GSTR-3B form. So, in many cases, registrations are made, and initial GST payments are missed. By the time the tax authorities figure it out, many of them have deregistered or shut shop.”
However, it seems unlikely that the government is going to be too strict in an election year. With Lok Sabha elections due in May, the GST Council has eased the compliance burden for small businesses. The Council, chaired by finance minister Arun Jaitley, relaxed the tax exemption limit from Rs 20 lakhs to Rs 40 lakh during its 32nd meeting on January 10. A point to be noted here is that Prime Minister Narendra Modi, in that famous interview to ANI’s Smita Prakash, had said the centre wanted the threshold to be raised to ₹75 lakh.
The council also extended the composition scheme to traders from informal sector rendering services or mixed supplies with a turnover up to Rs 50 lakh. There has been some speculation that the GST Council also plans to converge the 12% and 18% slabs to a midpoint of 15%. Jaitley himself had written about this in a Facebook post three weeks ago titled ‘18 months of GST’. M.S. Mani, partner, Deloitte India, approves of this idea. He said, “Chief economic adviser (Arvind Subramanian) had in the past suggested a revenue-neutral rate between 15% and 16%. Hence, the intention to move to that rate would be very welcome.” Such a move would make GST a two-slab tax, barring the exempt items and ‘luxury and sin’ goods taxed at 28%. The FM also wrote, “The country should eventually have a GST which will have only slabs of zero, 5% and standard rate with luxury and sin goods as an exception.” As of now, the highest slab of 28% has only 27 categories of products, down from the 228 at on July 1, 2017. Or, as Jaitley put it somewhat grandiloquently, “The Sun is setting on the 28% slab.”Maybe I should have opened with that?