In the first year of the goods and services tax (GST) regime, the consumer hasn’t benefited as he ought to have and small businesses have found it difficult to cope with the new system, while big businesses are getting used to it.
The tax bureaucracy is struggling to come to terms with loss of control and authority, while the fiscal managers are beginning to see the pot of revenue at the end of the rainbow.
In transactional terms, the B2C (business-to-consumer) segment is running well, but the B2B (business-to- business) sector continues to have operational and structural hiccups.
Revenue apprehensions have receded, especially in the overall tax collections, as some of the rate and base gains of GST are getting reflected in direct tax collections as well.
The one-year GST journey has seen quite a few speed breakers—tardy technology solutions, procedural lapses, systemic failures, architectural modifications and policy withdrawals.
The technology piece is still clearly struggling, while the procedural and compliance part is better than what it was six months ago.
At the end of one year, there are no roadblocks in sight.
There is still a long way to go before “one-tax one-nation" is achieved in letter and spirit. But there is no denying that one tax, one commodity is already a reality.
Coming from a regime of extreme dispersion of rates not only across states but within commodity groups, there has been a big move forward.
Similarly, while there is definite scope to make procedural and compliance matters simpler, there is no denying the fact that a year ago, businesses were filing multiple returns: separate returns for VAT (value-added tax), excise duty, service tax and countervailing duty. All these have been replaced by a GST return.
With one year of revenue flows, it can be argued that the GST Council erred on the side of caution and pitched the rates high. This was driven by revenue considerations as well as assessment of compensation financing requirements.
As such, it seems now certain that multiple rate slabs will converge sooner than later. It is very likely that the two slabs of 12% and 18% will converge to 14.5% earlier than expected.
Along with this, the number of commodities attracting 28% will have to be, and will be, trimmed.
In fact, it might just be the time to go in for another serious exercise of rate calibration based on aligning it to the overall macroeconomic situation.
A case in point can be the reduction of GST on construction materials from 28% to 18%, which will give a fillip to the economic activity.
The big surprise of the first year is that a producer state like Maharashtra has already made up for the revenue loss.
Even as the tax collection from “goods" is down, it has been more than made up by the “services" part.
At the end of year one, there are some sectoral issues that have surfaced.
The main among these is tourism, exporters and handicrafts, which need to be resolved.
For tourism, it is imperative that the tax refunds system is put in place at the earliest.
The effective tax burden on exports as well as handicrafts has become very high compared with the previous tax regime.
The issue of embedded taxes for exports will have to be resolved through a proper mechanism, and not in an ad hoc manner.
The big learning from the year is that if GST has to deliver, it must address two key stakeholders: customers and small business.
For the customer to benefit from the GST regime, it is essential that the regime of maximum retail price (MRP) system—an anachronism from control raj days which has no place in a GST regime—is abandoned.
The MRP system was relevant in a pre-liberalized economy operating with producer taxation.
The producers would work out the costs and margins of its distribution chain and allocate that within the MRP.
Now it is a consumption tax, with final payment of tax at the last stage. Here, it becomes an anomaly to have an MRP.
The result is, GST is being charged over and above MRP!
Under GST, the MRP seems to have created a retail price collusion as it becomes the de facto uniform price.
For small businesses, it is imperative to put in place a modified composition scheme, which will make the GST regime attractive.
With neither allowing input tax credit to the composition dealer nor raising of GST invoice enabling the buyer to take input tax credit, small businesses are in a bind; registered dealers are reluctant to make purchases from these composition dealers as compared with the purchases from registered dealers, where they get input tax credit. This has destabilized the supply chain and also affected purchases by registered dealers from the composition dealers causing business distress.
Haseeb Drabu is former finance minister of Jammu and Kashmir.