How India can reinvent the goods and services tax
10 min read 02 Nov 2021, 09:40 PM ISTThe tax regime needs a simpler structure and a less cumbersome compliance burdenA single GST rate for India has been an unmet goal. Countries with a single rate and simple GST laws have been successful in optimizing the tax revenue and minimizing tax disputes
PremiumRecently, the goods and services tax (GST) completed a tumultuous four-year journey. Though simple as compared to the erstwhile indirect taxes’ regime, the implementation still remains an unnecessarily complex one.
While the initial idea was to implement one national GST, given the federal structure of our country and the demands raised by various states, a grand bargain was arrived at. A dual GST was adopted. The Centre and the state governments now have equal tax jurisdiction across goods and services and have equal right to levy GST on the supply of taxable goods or services on intra-state transactions i.e., on consumption in the destination state rather than the producing state.
Unlike in the previous indirect tax regime where the tax base for levying excise duty and the state value-added tax (VAT) was different, the GST regime levies on a common base. Further, with regards to the inter-state transactions and transactions involving imports, an integrated goods and services tax (IGST) is levied by the central government, proceeds of which are equally shared between the Centre and the states.
While this looks simple as a concept, it is being implemented in the same old structure—a taxpayer having pan-India presence still needs to obtain as many state goods and services tax (SGST) registrations and track all of them separately besides the central goods and services tax (CGST) and IGST. This was the case in the erstwhile VAT regime as well where the taxpayer was required to follow as many state VAT laws.
However, an important silver lining is the fact that SGST laws and procedures are uniform across the country unlike the state VAT laws. Indeed, this has made life easier for the taxpayers and has reduced the anxieties and uncertainties surrounding the compliance procedures. Nevertheless, payment of GST, filing of returns, etc., have to be undertaken state-wise and not at one go. That’s a shadow of complexity from the erstwhile VAT era.
Realizing the necessity to simplify, the GST Council has recently set up two group of ministers, one for GST rate rationalization and the other for GST system reforms. It is about time that the GST Council takes bold steps.
Make it comprehensive
While introducing the GST in 2017, the GST Council took many decisions to arrive at a consensus. One such set of decisions was to keep certain products and services out of the GST net. Thus, petroleum products (crude oil, natural gas, petrol, diesel, and aviation turbine fuel), electricity, alcohol for human consumption, real estate have been kept outside the ambit of the GST regime.
However, keeping the end products outside the GST net and levying GST on inputs, input services and capital goods in the manufacture of these products results in a huge cascading effect leading to increased costs and loss for the manufacturers. Consequently, prices increase for end consumers. Petrol, diesel, electricity are glaring examples of such high input costs being recovered from end consumers. Further, these are making our exports non-competitive as the costs cannot be passed on to the international buyers unlike the domestic consumers.
Petroleum products should be brought under the GST net. To protect the revenue concerns of the Centre and states, a non-vatable cess can be levied over and above GST to be divided between the Centre and states. These levies will also play the role of “carbon tax" and promote de-carbonization, thus, help India achieve the Paris Agreement commitments.
A suitable non-vatable cess also needs to be levied on coal to promote de-carbonization. The biggest beneficiary of this change would be the transport sector, which becomes an important input for almost all the businesses and also for those sectors that use petroleum products as inputs. For instance, aviation turbine fuel is used by the airlines, and petroleum products by the petrochemicals as well as pharmaceutical sectors. They should be allowed to claim input tax credits of GST paid, thereby, reducing the cost of operations.
Furthermore, revenue loss if incurred by the states from the inclusion of petroleum products within the GST framework can be met by the Centre. Once this is done, electricity, real estate and finally alcohol should also be brought under the purview of GST so that the inefficiencies and cost escalations can be put to rest, once and for all. The inclusion of electricity in the GST ambit would also be extremely beneficial to the trade and industry. The task force on GST and the 13th Finance Commission observed that the impact of embedded taxes in power generation and distribution could account for up to 30% of the cost of production and distribution. If electricity is brought under GST, it will substantially enhance the cost efficiency as electricity is an input to almost all the trade and industry. Particularly, this can have a positive impact on labour intensive industries such as textiles, boosting exports especially in sectors where China is vacating its presence.
GST revenues for states have come under pressure during the pandemic and it is imperative that the states have a few additional sources of revenue to sustain their developmental agenda and provide resources for extended support during natural calamities. Bringing real estate into the GST fold fully will also uplift tax revenues significantly. The real estate sector is notorious for large unaccounted money transactions. While the Real Estate Regulatory Authority (RERA) regulations were introduced a few years back to enhance transparency, an end-to-end tracking of the money—from the land owner, sand supplier to the interior decorator—is necessary to unplug rampant tax leakage. The state-level stamp duty needs to be subsumed within GST. These measures will boost the housing sector, thereby, providing employment to a large number of skilled and unskilled workers. These reforms will also enable the urban local bodies to mobilize higher amount of property taxes.
Simplify the structure
Four years ago, the prevalent cumulative tax rate (excise duty+VAT) largely influenced the finalization of the GST rate structure. As a result, we have a rate structure that has five different rates, besides the compensation cess on certain goods. This plethora of rates has made the Indian GST a complex one.
For arriving at the appropriate GST rate, budget neutral rate (BNR) would have been a better criterion than the one that was adopted i.e., the revenue neutral rate (RNR). As far as the government budget is concerned, GST affects both the revenues as well as the expenditure.
Yet another relevant issue is the choice of the time horizon. Major structural reforms such as GST are really like capital expenditures that have upfront costs but yield results over a longer period. Hence, in arriving at an appropriate GST rate, the requirement of achieving budget neutrality in the first year itself is not useful. The burden on the budget due to GST reforms in the initial years should be treated as an investment made by the government with long-term gains. In most of the developed and emerging market economies as well, there is a single GST or VAT rate on all the goods and services. Countries with a single rate and simple GST or VAT laws have been successful in optimizing tax revenue and minimizing tax disputes. Of the countries that have implemented a GST or VAT in the past two decades, around 80% have chosen a single rate.
All along, a single GST rate for India has been an unmet goal. In fact, very early on, a single rate of 12% was recommended by the 13th Finance Commission. The age-old tax policy of having a differential tax rate for “must have" and “nice to have" goods and services should be done away with. The revolutionary reform of introduction of a single GST rate with additional non-vatable taxes on few demerit goods is now required. This will simplify the GST structure to a very large extent, putting to rest almost all the classification issues. A lower rate of GST would also mean less incentive for fraudsters to evade taxes. The genesis of the current GST frauds lies in the very structure of the rates as high rates make it lucrative for the fraudsters to evade taxes. We have examples of successful standard single rate GST/VAT regimes in Singapore, New Zealand, United Arab Emirates and Japan, to name a few. A single GST rate of 12%, 6% for the Centre and 6% for the states and Union territories (UTs), should be introduced at the earliest.
Ease the compliance
The current GST compliance requirement is to a large extent digitized and the introduction of e-invoicing in a phased manner is a step in the right direction. However, the input tax credit (ITC) mechanism needs to be simplified to a large extent. The key highlight of any value-added tax system is the ability of the tax payers to claim ITC of almost all the goods and services procured for supplying taxable goods and services. The tax paid on the input side ought to be available as a set-off against the liability on the output side. A simple provision allowing input tax credits of almost everything (with a small negative list) that the businesses procure and the expense of which is debited to the profit and loss account needs to be introduced replacing the existing complex ITC mechanism.
The e-invoicing mechanism is now mandatory for taxpayers who have a turnover of more than ₹50 crore. The plan is to make it compulsory for every taxpayer, eventually. Most of the high-value transactions are now covered by the e-invoicing mechanism. It is therefore suggested that the generation of e-way bill for those who are covered by the e-invoicing mechanism should be done away with. This will ease the burden of compliance for taxpayers, leading to a quicker turnaround of transport vehicles.
The Indian GST has been hailed as “one nation, one tax" since its inception. Indeed, there are no other taxes levied on the supply of goods and services that are under the purview of GST and the state GST rates, which are now uniform across all the states and UTs. However, businesses operating in more than one state or UT have to obtain the goods and services tax identification number, or GSTIN, for each of the states and UTs. They also have to file GST returns on the GST portal state-wise or UT-wise using as many usernames and passwords based on the number of states and UTs they operate in. This has resulted in cumbersome compliance. This has also not helped in reducing compliance costs. In fact, in some cases, compliance costs have gone up substantially given the sheer number of state-wise reconciliations that are required to be performed, month-on-month and annually. A single PAN-based GST login and password should be provided without the need for businesses to use state-wise login and password for compliances on the GST portal. A taxpayer having pan-India operations should be able to access the GST portal with a single click for all states. This one change itself will provide huge relief to businesses.
Yet another compliance issue is audits. Currently, GST audits can be undertaken by both the central as well as the state GST authorities. There has to be a mechanism in place to ensure that there are no ‘dual audits’ undertaken for the same taxpayer which may lead to unnecessary burden. The current bifurcation of the taxpayers, done between the central GST authority and the state GST authorities, could be followed for conducting the audits. Or, a turnover threshold-based system could be designed to divide the audit activity. All taxpayers having a turnover above ₹5 crore, for example, can be audited by the central GST authority while those below the ₹5-crore mark can be audited by the state GST authorities. The audit program should be consistent across the country and a national audit GST manual should be designed to be followed by audit officers.
The GST Council has already formed a committee of officers to have a joint and collaborative approach for GST audits as well as capacity building. The terms of reference for this committee should be extended to include GST enforcement and intelligence initiatives as well. The current GST dispute resolution mechanism also needs to be reformed to a large extent to smoothen the overall compliance experience.
Time is opportune to make the Indian GST a simple one, paving the way for reduced compliance burden on taxpayers by simplifying the GST structure and procedures. By adopting the best international practices mentioned above, India can play a pivotal role in becoming a dominant player in the global value chain and accelerate economic growth as the refined GST will attract new investments and make our economy a counter magnet to China. There is a tremendous potential for increasing India’s share in the global value chain with enhanced investment flows. These investments will generate greater employment opportunities and enhance the GDP growth. It will also provide resilience to the global economic system.
Vijay Kelkar is vice president, Pune International Centre; Rahul Renavikar is managing director, Acuris Advisors Pvt. Ltd.
