WHEN Goods and Services tax (GST) was introduced on July 1, 2017, it was expected that it will stabilize in around two to three years. It has not, even after three years. Faultlines are quite a few.
Before talking about the faultines, let us first look at the brighter sides, that is objectives of GST that have been achieved so far. Reduction of cascading of taxes through seamless flow of credit in the entire supply chain has been broadly achieved except that there are certain areas of denial of credit like blocked credit and some more. Similarly, there has been reduction of compliance costs by clubbing all the indirect taxes of centre and the states and also by abolition of entry tax and interstate check posts. These have also reduced the logistics and transportation cost. Further, some tax rates across the state coupled with abolition of check-posts leading to free inter-state movement have made India a common economic market in true sense. Lastly, the spirit of co-operative federalism displayed in the proceedings of the GST Council by both Centre and all the States should be a role model for decision in other areas where both Centre and States have a role to play.
Now, the fault-lines. The implementation of GST without making the GST Net (GSTN) fully operational after due test runs was the first blunder. From the very initial stages of planning the introduction of GST, it was clear in the minds of the policy makers that a robust IT infrastructure support was sine qua non for proper implementation of GST. That’s why the GSTN together with all its supporting operational modules was conceived to support the administering of GST.
The administering of GST itself is taxpayer driven inasmuch as the tax liability is self assessed and the input tax credit is self availed of by the taxpayers; even the registration of the taxpayers was allowed without any physical verification. Given this disposition and the reality of existences of a small percentage of delinquents in the trade and industry, it was felt essential to have some built-in safeguards against tax evasion. The GSTN was to ensure that all the transactions were documented and backed by e-invoices, and that appropriate returns were filed periodically so as to facilitate matching of invoices and weeding out of all fake or fraudulent transactions. The invoice matching was so planned that the invoices uploaded by the buyer (recipient of a supply) had to match with the invoice uploaded by the seller (supplier) for a particular transaction. This was necessary for validating the claiming of credit by the buyer.
Besides, keeping in mind the interest of the Small Business, an important sector in our economy which contibutes more than seventy five percent of the total employment in the country, a scheme of GST Suvidha Providers (GSPs) was envisaged. The GSPs were to help the Small Business who did not have their own IT infrastructure, in their interactions with the GSTN for filing of Returns, generation and uploading of invoices etc. Some thirty four GSPs were identified and duly authorised too.
However, since GST was implemented without giving the GSTN sufficient time to have the test runs and make it fully operational in respect of all the modules, the GSTN failed to deliver in some crucial areas. The invoice could not be uploaded, the GSPs did not get the link for acting on behalf of the Small Business, there were glitches even in the first business process of Registration, just to name a few. All these created chaos. In the ensuing confusion, there was a knee-jerk reaction and several decisions were taken like simplified formats of documentation for the business processes, going in manual mode in certain areas, postponement of e-invoices and invoice-matching etc. Consequently many evaders used the loopholes for various purposes like claiming of input tax credit without payment of input tax, generation of fake invocies without any supply of goods, creation of number of fake firms by obtaining registration fraudulently by use of fake documents since there was no requirement of physical verification of premise for registration etc. Besides claiming input tax credit and adjusting them against tax liability, there have also been instances where the ‘star exporters’ used fake input tax credit to pay tax and then claim a cash refund. The so called ‘star exporters’ were non-traceable at their registered addresses. There have also been cases of fake invoicing used for fraudulent tax credits that were encashed through the facility of Integrated GST (IGST) refunds. There were also cases where cash refunds were claimed against input tax credits in case of ‘inverted duty structure’ . For example, in a case detected in 2019, a group of people created a network of 500 firms that included fake manufacturers of ‘Hawai Chappals’ and fake retailers to claim and encash fake credit. In this case, the raw materials had an applicable tax rate of 18 per cent whereas the Chappals were taxed at 5 per cent. This network had created fake credit amounting to Rs 600 crores.
A case was also detected where there was a complete system of parallel economy in which the entire supply chain functioned without any payment of GST at different stages of the supply chain. There was an actual supply of goods, but without payment of GST – a case of clandestine removal of goods.
These are only illustrative. In the first year of GST implementation i.e. during July 2017-June 2018, the tax authorities were more concerned about the acceptance of the new tax regime by the people at large and hence almost no attention was given to the anti-evasion measures. But as mentioned before, the tax evaders took full advantage and tax evasion became huge as was found once the CGST officers started the anti-evasion measures.
In light of the foregoing, it can be said that if only the GST implementation was delayed by a few months in consultation with the GSTN authorities, and the GSTN was made fully operational, before the GST was implemented in July 1, 2017, we would have seen a much better and well accepted GST without leakage of revenue and the tax revenue booming from the second year itself.
There were policy glitches too. First, the treatment of Small Business. Across the world, the threshold exemption for GST is kept reasonably high – between equivalent of Rs. 80 lakhs to Rs one crore. The reasons are that the collection of tax from small Business is not cost-effective and it breeds corruption. As against that, we in India had kept the threshold at Rs. 20 lakhs. It was very low. Now it has been enhanced to Rs 40 lakhs – but only for goods, and not for services, for which threshold remained at Rs 20 lakhs. This is not correct. Conceptually , the GST regime must treat goods, and services at par. This differentiation has created disputes and controversies. The Government should make Rs. 40 lakhs the threshold for both goods and services.
There is another differential treatment for goods; the threshold exemption is available only for intra-state trading. The moment, the trading is inter-state, the supplier of goods loses the exemption benefit. This has led many small units not to make inter-state supplies, and this has led to closure. This restriction is not there, and for good reasons, in respect of trading in services. The Government may remove this restriction for goods as well.
Next area of concern is in respect of GST revenue collection. GST collections have been falling short of target continuously from the first year of its introduction except for a very few months when it achieved the monthly target of Rs one lakh crore. Initially, in the first two years of GST implementation, the reasons were attributed to the following. Target was fixed keeping the higher tax slabs for a big chunk of the goods at the time of introduction of GST. A series of GST rate cuts and other relief measures made a servere dent in GST revenue. The second reason was low compliance rate in payment of GST. The number of non-filers of GST returns kept on increasing during 2017 and 2018. The third reason was tax leakages and tax evasion in large numbers during 2017 onwards, some of which were detected by the GST enforcement authorities from 2018-19 onwards. It is observed from a statement of the Union Finance Ministry in 2019 that a large number of fake firms were caught by the different anti-evasion agencies which had estimated tax evasion implication to the tune of at least Rs 15,000 crore, only for a short period. This gives an idea about the huge tax evasion that has been taking place because of a miniscule perecentage of fraudsters among the taxpayers. We need more strengthening of our anti-evasion machinery.
But, the most important reason for GST revenue short fall is a continuous slowdown in the Indian economy from 2018 onwards. Initially, the pace of slowdown was slow, but from 2019 it started deteriorating at a fast pace, and it continued even before the impact of COVID -19 on the economy which was from later half of of April 2020. One must understand that GST is a tax on supply of goods, and/or services. With the slowdown in economy, the purchasing power of the people (consumer) came down that led to less consumption, which led to fall in demand, which led to fall in supply of both goods and services. When the supply falls sharply, the GST revenue which is a tax on supply will automatically fall sharply.
Going by the predictions of individual economists as well as various institutions like World Bank, our GDP is apprehended to be much lower than the targeted one. So, there is no likelihood of revival of economy or significatnt increase in supply of goods and services. Reportedly, the June collection of GST was only Rs. 45 thousand crore till 20th June against the monthly target of Rs. One lakh crore.
This is a challenging situation, and this is the time to take good care of the health of GST by taking certain corrective steps which have been discussed many times, but no decision was taken for the fear of loss of GST revenue. Now that the said object of fear is a reality, and it’s very difficult to shore up the GST revenue, the Government will have to look at other non-tax revenues like disinvestment, infusing money in the economy to increase consumption etc. On the other hand, the GST policy makers may look at this challenging situation as an opportunity to correct the past mistakes and make GST healthier. The economy is bound to improve after a while, and with such improvement there will also be improvement in GST revenue collection. Let us have a healthier GST by the time the economy bounces back.
Keeping this in mind, following proposals are highlighted.
1) Rationalisation of GST rates
Although one talks about just four rates of GST – 5%, 12%, 18% and 28%, in practice currently there are seven (7) rates of GST for goods viz . 0%, 0.25% 3%, 5%, 12%, 18% and 28%; for services there are five (5) rates viz. 0%, 5%, 12%, 18% and 28%. Besides, there is a Compensation Cess on some select supplies.
Given the overall economic situation of the country and financial capabilities of the taxpayers, it is suggested that we have only three rates of GST – one standard rate of say 15% which will cover most of the goods and services, one lower rate of say 5% for goods and services of mass consumption by the common man and one higher rate of 28 % for demerit goods and luxury goods. Some essential goods and services may be either exempted or kept at zero rate of tax.
On classification issues, the GST Council may have a list prepared for all disputed goods and services and decide on their classification which can be circulated by the council Secretariat for their implementation, like the Tariff Circulars that used to be issued by the then Central Board of Excise and Customs for compliance by the Central Excise Commissionerates. This approach would avoid the controversies like the one on GST rate on Chapati and parotha which was unfortunately ridiculed on various platforms.
2) Inclusion of Petroleum, Real State (Stamp Duty) and Electricity
Inclusion of these items in GST is a longstanding demand from the Trade & Industry. Constitutionally, Petroleum is already within GST. Now it’s waiting for the GST council to notify it. Like Petroleum, electricity is also an essential input for all manufacturing activity. Their inclusion will give the trade the benefit of seamless credit. This inclusion in GST will boost the manufacturing sector which is so much needed at this time.
Similarly, the bringing of the matters relating to the land like stamp Duty on transactions in Real Estate within the ambit of GST will bring great relief to the Real Estate Sector.
The adverse revenue situation has provided a challenging opportunity for the Government to take the bold decision of including the foregoing items.
3) Prioritise Rate Fitment Exercise in certain critical areas like Inverted duty structure, Make in India schemes etc
First, the instances of Inverted duty structure would need to be reviewed. Accumulated excess credit due to inverted Duty Structure where the GST rates on raw materials are higher than on finished products leads to the blockage of working capital which in turn encourages the taxpayers to resort to incorrect reporting of transactions.
While on the Rate fitment exercise, due consideration will have to be given to boost schemes relating to Make-in-India, Export thrust areas, consumption Items that are essential in nature, Solar Power generation Plants, Indian Railways etc.
4) Frequent Changes in GST rates
At the initial stages, it was rather necessary to resort to frequent changes in GST rates, since those were the growing up times with trial and error. But this inconvienced the Trade because of the lack of certainty. Now, it’s time not to have frequent changes. Ideally, the changes in GST should be only once a year and that’s during the Annual Budget presentation. GST Council may make the recommendation to the Centre and the States by the middle of January so as to put these in the Budget proposals of February 1. Of course, there may be exceptions for situations relating to natural calamities, public health issues and other emergency conditions.
5) Need for quick finalisation of New Return system, e-invoicing, Invoice Matching etc.
As for Return filing, it may be recalled that after the fiasco at the very initial stages of introduction of GST, the return filing system was made too simple with loopholes which the delinquents among the trade abused to defraud the revenue. There was a need for going back to the original plan of e-invoicing and invoice matching together with a new GST Return system.
In the current system, the taxpayers are filing two Returns called GSTR 1, which contains details of all outward supplies and the other called GSTR-3B which is a monthly self declaration of outward supplies, input tax credit availed and taxes paid.
Under the proposed new GST Return System, there is one main return called GST RET-1. This will contain details of all supplies made, input tax credit availed and payment of taxes including interest, if any. The GST RET-1 will also have two Annexures – GST ANX-1 for outward supplies and GST ANX-2 for inward supplies.
Further, under the new system, the e-invoicing scheme would force the taxpayers to push transactional level details on the GSTN posted for every Business to Business (B2B) transaction so as to ensure seamless flow of only the legitimate tax credit. This should drive away spurious taxpayers out of the supply value chain, some examples of which have been mentioned before. This will happen because the tax credit would be matched digitally by the government portal itself, without any need for manual intervention, thus ensuring a balanced reasonable and impartial credit mechanism.
6) Need for drastic upgradation of GSTN, the IT infrastructure support of GST.
Even as GSTN is doing good work in spite of the currently ingrained technological challenges, it will have to do a lot more to meet the expectations of a seamless technological interface and to produce a world class tax compliance system which would be capable of executing most of the work of taxpayers and taxmen. India has produced would class IT engineers and software developers. GSTN should recruit personnel from such pools of excellence and for this purpose, the government may provide additional funds as necessary. After all, the GSTN is now government controlled.
7) Need for further strengthening of Anti-evasion/ Enforcement machinery to prevent GST evasion
As explained, the administering of GST is taxpayer driven. All critical things are decided and benefits availed of on the basis of a taxpayer’s self declaration. In such a self-assessment regime that trusts the trade, there is a simultaneous need to have a powerful enforcement/anti-evasion machinery to take care of the delinquents and their activities. Besides strengthening of the Directorate General of GST Intelligence (DG GI), by opening more branches in locations that are evasion prone, there is also the need for strengthening the anti-evasion machinery of the Commissionerates and Divisions too. More extensive usage of GST Data Analytics for identifying potential GST frauds, with the help of the data emanating from the GSTN is absolutely necessary. The supervisory officers in the Commissionerates will have to do a lot in non-compliance, follow up of GST reporting with the use of dashboards so that it is suitable to the officials in the entire chain of command.
The Government has indeed taken quite a few steps recently to curb GST evasion. One useful step was to block the facility to generate e-way bill, an electronic document statutorily required to be carried for transportation of goods from one place to another, in respect of the taxpayers who had not filed the GST Return for two consecutive months. Once blocked, the e-way bill generation for such defaulters will not happen on the e-way bill portal. This helps in arresting tax evasion and also in disciplining the taxpayer. In another move, the authorities have started cancelling registration of taxpayers who had not filed the GST Returns for three consecutive months.
It is generally impractical and undesirable to have site verification for registration of taxpayers. But, in the context of the increasing number of cases of issuance of fraudulent invoice by fictitious parties to pass on the ineligible tax credit, it may be considered whether mandatory site verification above a certain threshold can be introduced in respect of some sectors that are prone to tax eversion, such as dealers of scrap, minerals, Gutkha etc.
Another important anti-evasion measure would be real time sharing of information between GST Officers of Centre and the state(s) concerned, so that actionable intelligence can be developed and enforcement action taken with the cooperation of each other.
(8) Need for a robust Audit Regime
Prof. Richard Bird, a leading expert and author of many books on GST / VAT, said that Audit is the heart of GST and it’s as important as Enforcement measures. It’s only through Audit mechanism one can keep a check on the tax compliance irregularities and tax evasion. Unfortunately, GST Audit has not yet been initiated even after three years of implementation of GST. The Audit manual has also not been finalized; a draft manual has been circulated for comments. The problem here is that the dates of filing of Annual Returns, even for the period 2017-18 were being continuously extended. So was for the later period. Consequently, the Department had only the preliminary reportings as declaration of the taxpayers, and not the final declaration which would have come through Annual Returns. But even with that difficulty, the books of accounts which were closed for 2017-18 could have been taken up for reconciliation for the purpose of GST. It is felt that there is a need to freeze the extension of Annual Return filing date so that scrutiny and assessments could be commenced and finalised early. This will help identification of tax evaders and follow up action. This will also give a sense of finality to the taxpayers.
So, the Audit Manual would need to be finalized soon and audit planning started immediately thereafter.
9) Need for complete overhaul of Advance Ruling Mechanism
It’s well recognised that Advance Ruling Mechanism is an essential part of of Pre-Dispute Resolution initiatives, and it’s an important component of an efficient and professional tax design. But, the current Advance Ruling Mechanism in the GST regime has created problem rather than solving them – mainly because of its structure and design. Quite often there are conflicting rulings from different state level Advance Ruling Authorities. The National Authority on Advance Ruling (yet to come into force) is there for receiving the cases of conflicting rulings from the states. The National Authority’s jurisdiction is limited to that only.
It is however felt that instead of the National Authority, there should be a Central Appellate Authority for Advance Ruling at Delhi with members from both Centre and States and headed by a retired judge. This Appellate Authority will hear appeals against the rulings of State Advance Ruling Authorities, and its order will be final. The central appellate authority may have branches in other metro cities like Mumbai, Kolkata, Chennai and Bangalore, to start with. All such appellate authorities on advance ruling in different metro cities including Delhi will be of the same rank and level. Its only that the administrative setup will be centralized at Delhi.
This proposal may be given due consideration.
10) Review the need for Anti-Profiteering Mechanism
Anti-profiteering Mechanism is not a taxation matter; it was brought in as a consumer welfare measure. It was thought that in the new taxation system like GST, it would be better to keep a tab on some in the industry to ensure that all benefits of tax reduction or exemption are passed on to the consumers. It was meant to be for the initial few years. The moot point is that its not GST, but the price control laws and competition laws that will govern the decision regarding profiteering.
The functioning of this Authority would need to be reviewed and a decision taken whether it would still be necessary to continue with the Anti-profiteering Authority.
11) Need for activating GST Compliance Rating mechanism
Section 149 of the CGST Act provides for the GST compliance Rating Mechanism. It’s basically meant for rewarding and giving government recognition for honest taxpayers. It was thought that this will incentivize the suppliers of goods & services having high compliance rating.
But, even after three years of GST implementation, it has not yet been activated. Its high time to do it now.
12) Fate of GST compensation cess
The obligation of the Centre to compensate the States in the event of loss of revenue will be over on June 30, 2022, when the five years of GST implementation will be over. Accordingly, the levy of compensation cess on specified items should also end on June 30, 2022. There should be a beginning of serious discussion between the Centre and the States on the continuance or otherwise of the scheme of compensation and the levy of compensation cess beyond June 30, 2022. It has also to be kept in mind that in a federal structure of democracy, as in our case, the state should also be financially strong so that they do not have to depend on Centre for financial help.
13) Follow the basic principle of GST to treat the goods and services at par and thus help the small Business
As discussed before, goods and services should be treated at par. Therefore, the revised threshold of Rs. 40 lakhs should be applicable to both goods and services. Currently, it is Rs 20 lakhs for services. This will help the small service Providers.
Similarly, to help the small Business service, there should not be any denial of threshold exemption in cases of inter-state supply of goods. Such denial is not there, and rightly so, in case of inter-state supply of services.
In conclusion, there is nothing wrong with the basic form and structure of GST. It’s only that its implementation should have been much better than what the taxpayers have experienced. It has been work in progress for the past three years. Now it’s time to close all the basic issues and confine the principle of work in progress to only the fixing of nuts and bolts. The issues raised in this article crave for due consideration of the policy makers.
GST has come to stay and let us all join hands to make it stronger and popular with the taxpayers.
(The author is former Chairman of Central Board of Excise and Customs (CBEC), and has penned three books on GST, the last one being “GST explained for common Man”.)
[Views expressed are personal]