Jayachandran/Mint
Jayachandran/Mint

Opinion | An unfinished reform in need of a final push

A report of the Comptroller and Auditor General highlights shortcomings in the goods and services tax. It should serve to strengthen the weak links in our reformed system of taxation

Two years is a reasonably long time for any new reform to be fully implemented. But the goods and services tax (GST), rolled out in July 2017, is still a work in progress. By now, most of its problematic aspects, such as the multiplicity of rate slabs and complexity of filing returns, ought to have been addressed. Yet, plenty of work still needs to be done. Apart from slab reduction, compliance simplification and a friendlier online transaction reporting interface, the GST needs a workable mechanism to check evasion. A recent report on the tax by the Comptroller and Auditor General of India (CAG) highlights these shortcomings. It draws special attention to the system’s vulnerability to fraud by way of excess input tax credit claims—which are refunds of taxes already paid by input suppliers, GST being applicable only to the value added by a business or service provider. While there is no denying that the GST today is better than it was two years ago, the fact that some of its original goals remain elusive suggests the need for a course correction.

One of the major issues outlined by the CAG report is the lack of a system to match the invoices of buyers and sellers that would have closed interstitial spaces for tax evasion. The idea was to structure the system in such a way that there was no gap between two ends of a reported transaction. This way, neither party could under-report its value without detection, making it difficult for payments to be kept hidden. For business supply chains involving several entities, a robust database of doubly recorded payments also meant that a cascade of taxes from one production link to another could be eliminated, with input credits at each stage ensuring that only value addition would bear the net GST burden. For smaller units, however, the system proved so hard to comply with that adoption was slow and the credit system didn’t work out as smoothly as envisaged (restaurants and some realty projects were even allowed to abandon credits for a lower overall rate). As complaints grew, New Delhi withdrew the invoice-matching system. This deprived the taxman of full information on transactions, leaving him in the dark on whether credit claims were true or inflated.

As India’s informal sector shrinks as a proportion of the whole, the credit system will be easier to sort out, but ease-of-compliance must hasten the process. Among other problems, the CAG report points to an alleged deviation in the way GST revenue is shared with states. To determine how integrated GST is to be split up, the report notes, the government has followed a formula prescribed by the Finance Commission, though it should have gone by the Constitution and Integrated GST Act. All this suggests that the GST needs urgent fixes to resolve its deficiencies. A rehaul at this stage would be impractical, but a series of measures can surely be taken. The gains on the efficiency front alone could be significant, given the current economic slump. In theory, a common and easy-to-pay tax on all value generated doesn’t just invite wider participation, it also allows for greater specialization (since it is cascade-free), smoother commercial operations and a more competitive economy on the whole. To maximize the potential of GST, the government needs to examine its flaws closely. It’s much too important a reform.

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