India has finally been able to enter the goods and services tax (GST) regime. The GST will be celebrated as a watershed moment in the history of India’s economic reforms.
The GST was first mooted by a task force headed by Vijay Kelkar in 2003 and the then NDA government welcomed the recommendation. Later, the Congress-led government of the United Progressive Alliance (UPA) took the first concrete legislative steps in 2011.
Over time, the GST’s framework received critical inputs across party lines.
It is indeed creditworthy that notwithstanding during the 14-year-long process, all decisions by the GST Council were taken by consensus.
Advantages of the GST regime
- Simplification of the indirect tax system: The GST replaces 17 indirect taxes (each requiring a separate return) and 23 cesses. Thus, it greatly simplifies the indirect tax system and the tax compliance.
- Unification of the markets: GST unify the country into a single market, at least in terms of all the goods and services that are covered in it. It will help easing inter-state trade. More trade volume will eventually boost the businesses. At present, Jammu and Kashmir has not joined the system but likely to join soon.
- Elimination of the cascading effect: Since GST is a tax based on the value addition at each stage of production, allowing producers to claim input tax credit, it removes the cascading effect of indirect taxation that existed till now.
- Equitable and socially reformative: It also is more equitable and socially reformative since it strengthens the hands of the honest taxpayer while making it more arduous for the corrupt to evade taxes. In the long term, it will weaken the base of the shadow economy in India.
- Expansion of tax base: GST expands the tax base, allowing lower tax rates to possibly generate higher revenues for the central and state governments. This can further be spent on increased welfare spending.
- Ease of doing business: Apart from simplifying processes for the domestic producers and reducing the discretionary powers with tax officials, the GST also makes it easy for the global investors looking to invest their money into India. Clearly, the GST does provide India with a truly modern “way of doing business”.
What more needs to be done
- Base needs to be broader: Many commodities such as petrol, diesel, and potable alcohol as well as over 80 services have been kept out of the GST net. This will not only restrict expanding the tax net as well as the potential revenues but also impede the Government’s objective of curbing black economy.
- On-boarding troubles for small businesses: As several reports suggest, many a small business are ill-equipped as of now to transition to the GST framework, mainly due to the speed with which the government has chosen to go through the last stage of the GST’s introduction.
- Concerns of the industry: Industry bodies, e-commerce companies, businesses are worried with the dual administrative control with both Centre and state, unwieldy powers to tax authorities, restrictions on input credits, among other things.
- Persistent anomalies: Differentiation between who can claim input credit and who cannot could be a cause of disputes, and even where taxes are allowed to be creditable, they will not be refunded but adjusted with output tax. In a modern taxation law, excess credits are mostly refunded within a stipulated time period of mostly two weeks and any delay earns interest at the market rate. This feature is absent in the GST regime.
- Complexity: In many parts, the GST system is complex. Some examples are as follows:
- The law permits refunds for exports and not for the entire domestic production. Moreover refunds will not be automated, it will require manual approval of as many as 36 offices at the Centre and in the states.
- While GSTN (Goods and Services Tax Network) will reduce human interaction, but with the states insisting that accounts and compliances of taxpayers be decentralised, it would further add to complexity.
- Businesses with nationwide operations would be required to register in each state of operation. Thus, telecom companies will have to apply for 36 registrations, one for each state. Businesses will have to deal with 36 registration numbers, as compared to one today.
It is important to note that such challenges need to be addressed at the earliest to strengthen the people’s faith in the tax system. It is in this regard that it is yet again the shared responsibility of the governments — both at the Centre and the states — to heed the president’s advice and continuously review and improve the implementation of the GST.