The goods and services tax (GST) is now 18-months-old, like a toddler learning to walk on its own. The early life of GST has already seen many changes, from rate changes to increase in the threshold limit and from simplification of compliance framework to tinkering of legislation. A few recent changes can arguably be seen as driven by political compulsions.
Simplification in tax rates
We started with a complex multi-rate structure, with five tax slabs of 1%, 5%, 12%, 18%, and 28%. In November 2017, the rate was slashed from 28% to 18% on more than 170 items in one stroke—these ranged from sanitary fittings to detergents.
This was followed by further pruning of the list in July 2018 and then in January 2019.
There is no doubt that the 28% slab was never a good idea to start with. It is globally proven that an indirect tax system works best with moderate tax rates and a wider base. Structurally, this should also pave the way for simplification of the rate structure, from five slabs to possibly three over the next couple of years.
Hike in exemption threshold and ease in compliances
The GST Council decided to provide an option to states to increase the exemption threshold limit from ₹20 lakh to ₹40 lakh per annum but only for ‘goods’. At one stroke, it is expected that two million taxpayers would now be out of the GST net. While ₹40 lakh (there was a discussion about making it ₹75 lakh earlier) looks much higher than the earlier value-added tax (VAT) and service tax regime, it is still lower than the limit in many other countries having a GST or VAT system. It will also help the tax administration to focus on larger businesses, which pay a majority of taxes. That said, from a policy standpoint, it would have been better if all states had a common threshold limit, and for both goods and services.
The introduction of a composition scheme for service providers up to ₹50 lakh of annual turnover and allowing filing of just one return in a year also looks like a step towards reducing the compliance burden faced by small businesses. It will also help reduce the load on the goods and service tax network (GSTN) portal. However, in this process a new tax rate at 6% was introduced for services, which slightly complicates the structure.
Discussion on GST in Real Estate
Real estate may be the only major sector where the effective rate of tax has gone up in GST.
To address this, the government is apparently contemplating a reduction in the GST rate to 5% (without input credit) or around 8% (with input credit) for property under construction.
Simplicity, transparency and stability have to be key features of our GST and restricting input credit for any sector, particularly in real estate, goes against these objectives.
It also disincentives formalisation of the sector and lures businesses to deal in cash.
Hopefully, the council will reduce the rate, while allowing input credit.
Most of the decisions of the council appear to be in the right direction.
However, it needs to be ensured that the concept of ‘one nation, one tax’ does not get diluted by measures such as providing an option to states to decide whether to continue with a threshold limit of ₹20 lakh or increase it to ₹40 lakh or selectively pick up sectors and restrict input credit.
We are eager to see how the next chapter on GST unfolds.
Pratik Jain, partner and leader of indirect tax at PwC India.