Goods and Services Tax: Looking at a New Roadmap

Above: The GST Council meeting in progress on October 6, to look into some grey areas. Photo: UNI

Prime Minister Narendra Modi is quite used to taking criticism in his stride. He either ignores it, or dismisses it as the rants of opponents who have nothing better to do than to throw darts at him. But when the venerable Reserve Bank of India supports a negative assessment of his government’s key economic initiatives, he has no option but to sit up and listen, as well as to act.

Well before the implementation of the Goods and Services Tax (GST)—described by the government’s spin doctors as the mother of all big bang tax reforms—doubters had sprung up from within the academic community, chartered accountants, and tax lawyers who advised caution and gradualism. Among them was India’s most notable tax and corporate attorney Arvind P Datar who predicted at Hyderabad’s NALSAR that the scheme was headed for serious trouble. In his talk on “Constitution, Federalism and GST” before students of the prestigious law university, Datar warned that a “terrible” thing was about to happen to the country. “It is not known whether the software has been tested. In order to avoid chaos, the GST regime should be implemented in phases. It should be first implemented for select industries and then expanded further.”

Senior advisors paid scant heed to these cautionary notes until, barely three months into the implementation of this scheme, the drizzle of criticism has turned into a torrential downpour. The barbs have been flying from all sides—traders, exporters, professional accountants, farmers, the media, and former finance ministers cutting across party lines, prominent among them BJP’s Yashwant Sinha and Congress’s P Chidambaram.

But the unkindest cut of all came from a totally unexpected quarter: the prestigious Monetary Policy Committee (MPC) of the Reserve Bank of India, in its fourth bi-monthly monetary policy statement, 2017-18. Headed by no less a luminary than Governor Urjit Patel, Modi’s personal choice for that post after the exit of Raghuram Rajan, the MPC did not mince its words in citing a prime cause for the alarming slowdown in India’s economy:

“Turning to growth projections, the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity…. Consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened in Q2 of 2017-18; on the positive side, firms expect a significant improvement in business sentiment in Q3. Taking into account the above factors, the projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent, with risks evenly balanced.”

The message was loud and clear. And the prime minister went into damage control. He went into a huddle with Finance Minister Arun Jaitley and party supremo Amit Shah who had to cut short a campaign visit to Kerala. And Modi chose the Golden Jubilee of the Institute of Company Secretaries to assure the country that he had instructed the GST Council to review the problems being faced by traders and the business community after the launch of GST. He said: “Hum lakir ke fakir nahin hain” (We are not inflexible)” and promised that his government is willing to make necessary amendments upon recommendations by various political parties and state governments.

On October 6, two days after Modi’s statement, the GST Council began its emergency session at Delhi’s Vigyan Bhawan under the chairmanship of Jaitley to try and iron out some of the major glitches. In addition, a committee led by Revenue Secretary Hasmukh Adhia, the Gujarat cadre IAS officer who was Modi’s principal secretary when he was chief minister, will submit a preliminary report to the Council on steps needed to provide relief to exporters who have also been at the receiving end of the SST shockwaves.

Even as the Council meets, India Legal asked former CBEC Chairman Sumit Dutt Majumder, author of the book Know Your GST- GST Unraveled, to take a reality check and explain what changes the country can expect to see in both the implementation and rationalisation of GST so that it can become more business friendly and help the economy grow into a one-nation-one tax structure as was originally planned.

Here are some of the problems along with solutions:

FIXING THE RATES

• Problem: The expectation that there would be one flat GST rate for all commodities across the country was not realistic for a nation comprising the super rich, rich, common man, poor and very poor people. There had to be different tax rates on different classes of goods consumed by different classes of people. Therefore goods generally consumed by the very poor and essential for a living were either exempted or put at the lowest rate of duty (5 percent); similarly, those consumed by the wealthy were taxed at the higher rate (28 percent). But there also appeared within this configuration some intermediate rates of 12% and 18% which creates confusion.
• Solution: Eliminate the multiplicity of rates which cause disputes in classification. In all likelihood, there will be fewer GST rates once revenue buoyancy is achieved.

MEDIUM, SMALL AND MICRO ENTERPRISES

• Problem: The role of small businesses in the economy, particularly in the area of employment generation, is paramount. It cannot be destabilised. The aim of converting the huge unorganised sector into the organised one by making it GST-compliant is idealistic rather than practical. The threshold for exemption from GST in India is the lowest (Rs 20 lakh /Rs 10 lakh for special category states) compared to international standards which generally vary between Rs 80 lakh and Rs 1 crore before taxes kick in. For example, Malaysia has a threshold of Rs 86 lakh.

Experts across the world have advised against taxing small businesses because it is not cost-effective, it is cumbersome and it breeds corruption. By keeping the threshold at Rs 20 lakh, the policymakers have already ensured that only a small number of very small businesses will remain outside the ambit of GST. But, even that exemption benefit has been further curtailed by the following two policy decisions.

First, there would be no threshold exemption for those who undertake inter-state supplies. Thus, even a taxpayer with an annual turnover below the threshold will have to pay GST if he trades across state lines. Such a taxpayer would have to discontinue inter-state supplies, thereby shrinking his business. Secondly, because of Reverse Charge Mechanism (RCM) applied to certain small businesses, the taxpaying recipients have been called upon to pay GST, take credit and file returns in respect of goods and services received from the unregistered suppliers who are below the threshold.

This is a burden on the taxpaying recipient since his working capital would remain blocked during the period of payment of tax and taking of credit, and the compliance costs of filing of returns on behalf of the supplier would add to his cost.

As a result, bigger businesses have stopped dealing with such unregistered tax payers. This is further wiping out small businesses which provide an estimated 60-65 percent of the country’s employment. The cascading effect will hit Big Business as well, since it depends heavily on the small business for supply of raw materials and components.

• Solution: The “composition scheme” which is available to small business up to the threshold of Rs 75 lakh provides the benefit of a flat tax rate of 1 percent to 5 percent and easier compliance. For starters, this scheme should be made available to the taxpayers making inter-state supplies. Reverse charges on recipients from unregistered suppliers will have to be abolished. Simply by withdrawing these disruptive clauses, more people will be able to avail of the “composition scheme” benefit.

TECHNOLOGY      

• Problem: It was expected that before implementing GST, the IT infrastructure known as the GSTN would be fully operational after test runs. That did not happen. The GST rules, based on which the IT softwares were to be finalised, were disclosed only a few days before the target day, leaving no time for the GSTN to be fully operational. Consequently, the GSTN was functional in parts and there were IT glitches for various business processes.

These deficiencies could have been largely corrected through a few test runs. However, the government must have had its compelling reasons to disregard the call in certain quarters for deferring the implementation by two months.

• Solution: On realising the gravity of the situation after implementation of GST, the GST Council in its meeting in September formed a Group of State Finance Ministers headed by Sushil Modi, the deputy chief minister of Bihar, to “monitor and resolve the IT challenges faced in the implementation of GST”.

The Group has started its work, and Sushil Modi summed up the situation by stating that correcting glitches in the GSTN was like repairing a ship while it was already sailing. It is hoped that the GSTN will be set right soon.

FILING RETURNS

• Problem: On procedural issues, there is an urgent need for simplification of the return filing process. Since the GSTN was not fully operational, the proposed system of filing three returns—GSTR1, GSRT2 and GSTR3—each month had to be postponed, and instead a system of filing GSTR-3B which was basically a monthly summary was introduced.
• Solution: This monthly return should be continued and the three monthly returns should be deferred till the time the GSTN stabilises and becomes fully operational. Further, amendment of GSTR-3B returns by taxpayers should be allowed. There is also the need for a relook at the requirement of 36 monthly returns each year for each state. Filing of quarterly returns with reduced number of fields may also be considered for the ease of doing business.
  

Another concern is on the matching of invoices which is designed to ensure that the input tax credit taken by the recipient matches those for which the supplier has paid the tax. This is likely to put tremendous pressure on the GSTN. This secondary process may also be deferred till the GSTN stabilises.

EXPORTERS

• Problem: Taxes are never exported. In the pre-GST era, the exporters did not pay tax in most cases. Wherever tax was paid, it was refunded in the form of rebates, drawback or export-refund. One basic principle of GST is: Pay tax first, and then either take credit or claim refund in appropriate cases. This has resulted in massive costs related to blocked working capital for exporters.
• Solution: Suggestions have been made to set up a dedicated fund to help the exporters. Another suggestion is of instituting an e-wallet mechanism for SMEs and complete exemption for merchant-exporters. Based on exports of the preceding year and an average GST rate, the e-wallet will facilitate crediting of e-currency in exporters’ accounts.

E-Way Bill

• Problem: An added disruptive issue is the introduction of the E-way Bill to track every movement of trucks across states. This will again put extra burden on the GSTN. Besides, stopping of trucks in highways to check E-way Bill will only delay the transportation of goods and breed corruption. Since all states have the same rate of states GST, the E-way Bill has lost its relevance.
• Solution: Scrap it, or at least defer it until the GSTN is fully operational. Its introduction will increase the transportation time and cost. E-Way Bill should preferably be dropped or deferred till the GSTN is fully operational.

Initial glitches notwithstanding, GST has to be taken as a “work in progress”. But the government has recognised the urgency of removing roadblocks, particularly those relating to interstate supply and the reverse charge mechanism for small businesses.