Making sure that GST really is Good and Simple tax

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The country’s biggest tax reform, Goods and Services Tax (GST) was implemented over a midnight ceremony at the Parliament Central Hall by PM Narendra Modi, after he delivered an elaborate speech and ushered the “one-tax-one-nation-one-market” regime from July 1, 2017. He concluded the ceremony by saying that GST is indeed “Good and Simple Tax” – good because it eliminates tax layers and simple because it makes filing returns easier.

GST has replaced a dozen of central and state levies such as excise, VAT and service-tax. Not only does it economically unify the country by ensuring the same commodity is taxed similarly across the country, it is a big step in ensuring that India joins a rules-based regime, to add to its credentials as the world’s largest democracy.

Today, as the GST has completed its first full quarter since roll-out, revenue collections from the first month appear robust, with just 70% of tax payers bringing in ₹95,000 crore. At this rate, the total tally could well surge close to ₹1.2 lakh crore. This would be significantly higher than the ₹91,000 crore indirect tax target for the Centre and the States on an overall basis. This initial trend will need to be corroborated by inflows for subsequent months, but the GST appears to have begun well as far as the exchequer is concerned. If revenues remain healthy, the government would, over time, get the necessary fiscal room to rationalise multiple GST rates into fewer slabs and possibly lower levies as a stimulus.

However, there are several shortcomings in the manner in which GST has been implemented. The first and most avoidable hiccups were the IT glitches. Several traders have not been able to file returns and pay taxes before the deadline due to glitches on the government website. Also, the GST system is entirely online and linked across the supply chain. In order to get tax breaks, everyone associated with a particular business or sale of goods or services needs to upload the correct documents. Even if one link fails to do so, the whole process goes awry. Though the idea behind this is to increase accountability and ensure that everyone pays taxes, some relaxation is required initially so that it creates less havoc.

There has been extensive tinkering since the roll-out of GST. A month into its introduction, the government slashed taxes on 19 services, including third-party services performed by textile mills and government contracts. Earlier this month, it cut the slabs for 27 items like food products, fibre, and e-waste. Frequent policy changes have also resulted in taxpayers delaying their filings in the expectation of more changes to happen.

For businesses, the going has been far from smooth, with firms of all sizes across various sectors struggling to file their first set of returns. Let us take a look at the broad impact of GST on Indian businesses.

Some of the benefits are –

  • Uniform running of business – There is no need to worry about state-wise VAT compliance anymore
  • Fewer Taxes – There will no Service Tax, Central Excise Duty, Duties of Excise, Central Sales Tax and others. This will bring down the burden of multiple taxes and avoid cascading.
  • Benefit to Startups – Turnover of Rupees Five Lakhs and above was required for VAT registration. With GST, the cap has been raised to Rupees Twenty Lakhs (Ten Lakhs in some states).

Now for the cons –

  • Certain sectors like Real Estate have been impacted negatively with GST causing price increases
  • While the consumer has benefited from lower prices on many items, a number of items have also become costlier
  • Additional compliance cost for SMEs
  • Increased working capital requirements for SMEs

On the brighter side, the 23rd GST Council meeting that was held in Guwahati on 9th and 10th Nov has taken a number of decisions that will benefit both the common man as well as businesses. Some of the highlights are;

Some of the highlights are –

  •  Tax rates are cut and therefore, as many as 177 items are made cheaper. The council has recommended major  relief in GST rates on certain goods and services.
  •  The threshold of Composition Scheme for small businesses is raised to ₹1.5 crore.
  •  Compliance burden has been eased for bigger businesses.
  •  On the services side also, change in GST rates are recommended by the Council to provide relief to aviation & handicraft sectors and restaurants. Tax rates on all restaurants have been cut to 5% without input tax credit.
  •  The list of 28% rated goods is pruned. Now only 50 items will attract GST rate of 28%.

GST has been in the making for 17 years. This being a marquee tax reform, the government had acknowledged before its roll-out that there could be teething trouble. While some of the issues faced thus far could have been avoided with better planning, these are still temporary in nature. It is evident that steps are being taken to address these issues. Though there were initial hiccups, GST is transformational both for the exchequer and for businesses in the long run.