Achievements and Failures of GST regime

WHY IN NEWS:

• The GST regime had observed its fourth anniversary on July 1 this year

BACKGROUND:

• The nationwide GST regime was rolled in 2017 to subsume and replace 17 local levies like excise duty, service tax and VAT and 13 cesses.
• GST has been a milestone in the economic landscape of India. It has decreased the number of taxes, compliance burden and overall tax burden on common man while significantly increasing transparency, compliance and overall collection

LEGAL BASIS FOR GST:

• In order to suitably implement the GST, 101st Constitutional Amendment Act inserted, deleted and amended of certain Articles of the Constitution.
• Article 246A: Special Provision for GST
  • This Article was newly inserted to give power to the Parliament and the respective State/Union Legislatures to make laws on GST respectively imposed by each of them.
  • However, the Parliament of India is given the exclusive power to make laws with respect to inter-state supplies.
  • The IGST Act deals with inter-state supplies. Thus, the power to make laws under the IGST Act will rest exclusively with the Parliament
• Article 269A: Levy and Collection of GST for Inter-State Supply
  • While Article 246A gives the Parliament the exclusive power to make laws with respect to inter-state supplies, the manner of distribution of revenue from such supplies between the Centre and the State is covered in Article 269A.
  • It allows the GST Council to frame rules in this regard. Import of goods or services will also be called as inter-state supplies.
  • This gives the Central Government the power to levy IGST on import transactions.
• Article 279A: GST Council
  • This Article gives power to the President to constitute a joint forum of the Centre and States called the GST Council.
  • GST Council is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of Goods and Services Tax in India
  • Its chairman is Union Finance Minister of India with ministers nominated by the state governments as its members.
  • The council is devised in such a way that the Centre will have 1/3rd voting power and the states have 2/3rd. The decisions are taken by 3/4th majority.
• Article 286: Restrictions on Tax Imposition
  • This was an existing article which restricted states from passing any law that allowed them to collect tax on sale or purchase of goods either outside the state or in the case of import transactions.
  • It was further amended to restrict the passing of any laws in case of services too.
  • Further, the term ‘supply’ replaces ‘sale or purchase’. 
• Compensation to States Under GST
  • 101^st Constitutional Amendment Act also contains a provision to provide for relief to states on account of the revenue loss to the states arising due to the implementation of GST. It has a validity period of five years

SALIENT FEATURES OF GST

• Four-rate structure:
  • The GST regime follows a four-rate structure that exempts or imposes a low rate of tax 5 per cent on essential items and levies the highest tax rate of 28 per cent tax on luxury and sin goods.
  • The other two tax slabs are 12 and 18 per cent.
  • In the pre-GST era, the total of VAT, excise, Central Sales Tax and their cascading effect led to 31 per cent as tax payable, on an average, for a consumer.
• Dual GST:
  • It is a dual GST with the Centre and the States simultaneously levying tax on a common base. GST to be levied by the Centre is called Central GST (CGST) and that to be levied by the States is called State GST (SGST).
  • Import of goods or services would be treated as inter-state supplies and would be subject to Integrated Goods and Services Tax (IGST) in addition to the applicable customs duties.
• GST rates to be mutually decided:
  • CGST, SGST & IGST are levied at rates to be mutually agreed upon by the Centre and the States. The rates are notified on the recommendation of the GST Council.
• Applicable on supply side:
  • GST is applicable on ‘supply’ of goods or services as against the old concept on the manufacture of goods or on sale of goods or on provision of services.
  • Hence it is a destination-based consumption taxation
• Reverse charge mechanism:
  • The GST is levied at every stage of the production process but is collected from the point of consumption (Reverse Charge Mechanism), refunding all parties eventually other than the end consumer.
• Goods and Service Tax Network (GSTN)
  • It is a non-profit, non-government organization.
  • It will manage the entire IT system of the GST portal, which is the mother database for everything GST.
  • The government will use this portal to track every financial transaction and provide taxpayers with all services – from registration to filing taxes and maintaining all tax details.
• Exemptions:
  • Businesses dealing in goods with an annual turnover of up to ?40 lakh are exempt from the tax.
  • Additionally, those with a turnover up to ?1.5 crore can opt for the Composition Scheme and pay only 1 per cent tax.
  • Services providers with turnover up to ?20 lakh in a year are exempt from GST. Business in the service sector with turnover up to ?50 lakh in a year can opt for composition scheme for services and pay only 6 per cent tax.
  • Moreover certain items like petroleum, alcoholic beverages and stamp duty are not included under GST regime

ADVANTAGES OF GST:

• For consumers:
  • Removal of cascading effect of taxes:
    • The cascading effect of taxes means paying taxes over a tax. Whenever a good is made, taxes are attached to it as it moves through different stages of production. Thus, the succeeding movement of goods causes it to be taxed inclusive of the tax levied in the preceding stage.
    • When a commodity reaches the end consumer, the price to be paid increases tremendously, causing inflationary costs.
    • Subsuming taxes under GST prevents this cascading effect.
  • Reduced price of products
    • In the long run >> due to reduction in cascading impact of taxation >> tax burden of traders will be reduced >> which results in reduced price for consumers
  • Uniform prices throughout the country
    • In the previous tax regime, we had State VAT which was levied on sale of goods.
    • As the rate of tax was different from States to States, there was variation in prices.
    • Also, certain taxes and duties (ex: entry tax) was levied only in certain states.
    • As GST is ‘one nation one tax’, there is a uniform price for all the products and services throughout the nation, there does not arise any such complexities.
  • Better accessibility of goods and services
    • As all the goods and services are charged one rate across the nation, the consumer does not travel across the states to make purchases for the purpose of saving tax.
    • Further, the online shopping companies will plan their operations to reduce the lead time, while managing the warehousing facilities, which today are contingent on filling complexities of the present tax structure.
• For the Government
  • Create a unified common market:
    • Will help to create a unified common national market for India. It will also give a boost to foreign investment and “Make in India” campaign.
  • Streamline taxation:
    • Through harmonization of laws, procedures and rates of tax between Centre and States and across States.
  • Increase tax compliance:
    • Improved environment for compliance as all returns are to be filed online, input credits to be verified online, encouraging more paper trail of transactions at each level of supply chain;
  • Discourage tax evasion:
    • Uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighbouring States and that between intra and inter-state sales.
• For businesses:
  • For small business
    • Under GST, small businesses (with a turnover of with a turnover up to ?1.5 crore) can benefit as it gives an option to lower taxes by utilizing the Composition scheme.
    • This move has brought down the tax and compliance burden on many small businesses.
  • Improved efficiency of logistics:
    • Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid the current Central State Tax and state entry taxes on inter-state movement.
    • These warehouses were forced to operate below their capacity, giving room for increased operating costs.
    • Under GST, however, these restrictions on inter-state movement of goods have been lessened.
  • Simple and easy online procedure
    • The entire process of GST (from registration to filing returns) is made online, and it is made user-friendly.
    • This has been beneficial for start-ups especially, as they do not have to run from pillar to post to get different registrations such as VAT, excise, and service tax.
• For overall economy
  • Bring about certainty:
    • Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods and services will lend greater certainty to taxation system;
  • Poverty eradication:
    • By generating more employment and more financial resources.
  • Reduce corruption:
    • Greater use of IT will reduce human interface between the taxpayer and the tax administration, which will go a long way in reducing corruption;

ACHIEVEMENTS:

• Widening tax base:
  • The number of registered taxpayers at the time when the GST was rolled out was 65 lakhs.
  • Over the last four years, 1.3 crore taxpayers have been registered under the GST network, while 66 crore tax returns have been filed.
• Increase in GST revenue collection:
  • The increase in GST collections is the result of efforts taken by the government which includes extensive automation of business processes, application of e-way bill mechanism, targeted action on compliance verification, enforcement based on risk assessment and introduction of electronic invoice system
• Unorganized sector is regulated:
  • In the pre-GST era, it was often seen that certain industries in India like construction and textile were largely unregulated and unorganized.
  • Under GST, however, there are provisions for online compliances and payments, and for availing of input credit only when the supplier has accepted the amount >> This has brought in accountability and regulation to these industries.
• Rate rationalisation:
  • In 2017, nearly 19 percent of items were under the 28 percent GST rate.
  • But currently only 3 percent of the items subject to the 28 percent GST rate.
• Promote Cooperative Federalism:
  • GST council has emerged as a successful example of cooperative federalism and its functioning has been free from political biases.
• Improved transparency:
  • Taxpayers can track their compliances online on the GST Portal.
  • Also, they can easily get the basic information about any business by entering the respective PAN or GSTIN which has increased transparency in the system.
• Ease of compliance:
  • It has also brought in efficiencies in indirect tax compliances and reduced the number of indirect tax authorities that business needed to interact with.
  • “E-Invoicing” has also ensured that a trade invoice is identified by a unique identification number which is generated by automated government-backed online portals.
• Increased Logistics efficiency:
  • GST has eliminated all the inter-state barriers by removing check-posts, introducing a nationwide e-way bill, eliminating the entry tax.
  • Thus, it has reduced transit time of movement of goods within the country. As per an estimate more than 50% of logistics effort and time is saved in GST regime.

CHALLENGES/FAILURES:

• Reduction in the fiscal autonomy of the States:
  • With the introduction of GST, many indirect taxes levied by the states have been replaced.
  • While these taxes were completely under the control of each state, GST rates are now decided by the GST Council >> This implies that states have limited flexibility in making decisions regarding tax rates on goods and services.
  • As per PRS Legislative Research report >> in 2018 transfers from the Centre are estimated to make 48 per cent of states’ revenue >> with implementation of GST, the autonomy of states is expected to reduce on an additional 17 per cent of their revenue.
  • That is, the decision-making power of states will be limited to 35 per cent of their revenue.
• GST’s collection shortfall has left a compensation hangover
  • Though GST limits the flexibility of states, the Centre’s guarantee of 14 per cent annual growth in this tax revenue, for a period of five years
  • This was offered to achieve consensus for the introduction of GST.
  • In case of less than 14 per cent growth, states will receive compensation from the Centre.
  • This issue became controversial when GST collections fell because of the pandemic
  • It is estimated that the compensation requirement in the current financial year (2020-21) would be ?3 lakh crore, while only ?65,000 crore is expected from the cess collection.
  • Centre states that total shortfall is estimated at ?2.35 lakh crore, of which ?97,000 crore is on account of GST shortfall, while the rest is due to the impact of Covid-19 on the economy
  • This was followed by disagreement over how to provide for this shortfall, with the centre proposing borrowing by state government, something that most states eventually signed off on.
  • It is also not uncommon to find state governments complaining about the centre delaying compensation payments.
  • This has emerged as a consistent tension in India’s fiscal federalism framework.
• Moral hazard in GST Council
  • The fact that state governments have been given a guaranteed revenue growth under the GST framework has created a moral hazard for the GST Council
  • There are repeated demands for reducing GST rates on all kinds of commodities from time to time, which have the effect of lowering the weighted average GST rate and therefore overall revenue collections.
  • Against the revenue neutral rate of 15.3% which was recommended by the Arvind Subramanian Committee, weighted average GST rate has been falling continuously and was just 11.6% in July and September 2019
• Overestimation of GST collection:
  • In the initial year government has overestimated the GST collection, which was not fulfilled, and hence created a sense of failed taxation regime.  
• Multiple Tax Rates:
  • Unlike many other economies which have implemented this tax regime, India has multiple tax rates.
  • This hampers the progress of a single indirect tax rate for all the goods and services in the country.
• Higher tax rates:
  • Though rates are rationalised, there is still 50 percent of items are under the 18 percent bracket.
  • Apart from that, there are certain essential items to tackle the pandemic that was also taxed higher.
  • For example, the 12% tax on oxygen concentrators, 5% on vaccines, and on relief supplies from abroad
• Failed to check tax evasion
  • GST tax evasion and tax fraud, including use of fraudulent invoices, fake e-way bills, etc has led to massive losses in revenue collection.
  • A news report in March 2020 states that India has faced over ?70,000 crore worth of losses due to tax evasion
• Failed to bring petroleum under GST:
  • Petroleum products are used as inputs for production or supply of other goods and services. Excluding them from GST results in cascading of taxes
  • The Centre and states have been increasingly dependent on excise duties on petroleum products to shore up their revenues.
  • Hence, the GST council has been reluctant to discuss the matter, as around 30 per cent of the states’ revenue comes from excise duties on petrol and diesel.
• Transitional Issues:
  • Even after four years, many assesses are still experiencing technical/legal issues as a result of the transition from the old to the new GST system.
• Complex tax slabs:
  • The complex slab structure and continually switching between them has created an undesired confusion in the compliance system.
  • Additionally, fluctuating tax rates often led to unethical profiteering practices.

WAY FORWARD:

• Ensuring tax predictability:
  • The GST Council should adjust the rates only once a year.
  • Further, the Center shouldn’t bypass GST by introducing any Cess.
  • The Center can also rationalise the present Cess ecosystem in India to a bare minimum. This will ensure tax predictability to states and enhance the ease of doing business.
• Simplifying tax structure:
  • A simpler tax slab structure limiting commodities to three tax slabs is the need of the hour. Experts have recommended a three-slab structure that will help rationalize this indirect tax system.
• Improving GST network
  • It can help accelerate the process of claiming input tax credit.
  • It can also increase the capacity of the portal to handle higher numbers of data processing.  
• Solving tussle between Centre and States:
  • Center has to be more accommodative to State’s needs such as granting compensation amount without delays etc.
• Exempt exports from payment of GST or automate refund process:
  • The Government collects GST from exporters only to refund it later.
  • The GST refund process blocks exporters’ money for a long time and affects their competitiveness.
  • The Government promised to refund 90 per cent of the money within seven days of making an application after export. But this did not happen.

PRACTICE QUESTION:

Q. ‘GST remains a partial-success despite introducing many positives to doing business in India’. Critically analyze?