2 min read.Updated: 20 Sep 2021, 06:13 AM ISTLivemint
Food-delivery apps must pay GST owed by eateries. This makes practical sense. But, in our high-frequency tweaks, we must not lose sight of what this tax system was meant to reform
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At its meeting on Friday, India’s GST Council decided among other things to shift the point at which goods and service tax (GST) would be levied on restaurants fulfilling food-delivery orders via aggregator apps such as Zomato and Swiggy. Starting next calendar year, e-com operators ferrying orders from eateries to homes will have to collect this charge for our tax authorities, rather than food-suppliers doing it. This is not a new levy, just a tweak of tax incidence, brought on by a gap found in its actual mop-up from restaurants and what should have reached official coffers, going by at-source GST deductions made by food-delivery apps, taken as a sign of rampant tax evasion. The pandemic not only boosted demand for online services, it saw a proliferation of mom-and-pop ‘cloud kitchens’ sending food home and set off a dash for survival among small units like roadside kiosks to enlist with apps. Not all of them had taxable turnovers, some ran on daily cash-flows without annual accounts, and many must have been in the grey zone of tax liability. As Friday’s move will enhance collections by drafting apps as agents of formalization, it offers a practical way out. In the frequency of our GST tweaks, however, let’s not lose sight of its basic aims.
As of now, most standalone restaurants are liable to pay 5% GST on dine-in services and home dispatches of their kitchen output, but cannot claim input tax credit. This was a revision made in late-2017; the rate was lowered and input credits were dropped after they argued that since raw ingredients were mostly sourced from the informal sector, they had few supply invoices to claim any tax already paid by suppliers. A similar exception was later made for real-estate developers, too, this time as an option. Both cases revealed the complexity of taxing services that straddle our formality divide. While the motives to fine-tune our GST system may be pragmatic, must we depart from its original reformist thrust quite so often?
It may be worth recalling why GST was hailed as a big reform in the first place. By design, GST’s superiority as an indirect-tax system was its promise of equitable levies that would also enhance economic growth by virtue of its key attributes: stable uniformity and value-addition applicability. On the first, while it did subsume a messy bunch of old taxes, what began as a valid division of merit versus non-merit rates has turned into yet another jumble. Rate brackets have multiplied, and with continual rejigs, GST today appears no less lobby-resistant than previous taxes, reducing its appeal to prospective investors and stirring doubts over rate fairness. While GST may still be “good" and reformist, it is no longer as “simple" as it was touted to be. Its other big attraction, that it applies as a value-added tax (VAT), gets nullified wherever input credits get axed. The benefits of taxing only the difference between an offering’s final worth and its input value, done by crediting taxpayers with GST paid on inputs by suppliers, are abstract but significant. Conceptually, a VAT is not just about relieving us of a tax cascade from one stage of production to another. As with the ‘pin factory’ in Adam Smith’s The Wealth of Nations, it is equally about task specialization, which it promotes across an economy by killing tax-burden disincentives to outsource what’s better done by others. This non-revenue goal of efficiency must never lose policy emphasis. For GST coherence and definitional clarity, input credits should invariably be allowed.