What lies ahead for the GST?

The Goods and Services Tax (GST), which was introduced in the country exactly one year ago today, was intended to reduce the multiplicity of indirect taxes and rates and expand the tax base, leading to improvement in tax collections. Across the world, many governments prefer expanding indirect taxes, as these are embedded in the price of goods and services and are therefore not visible to consumers, while being creditable to businesses. While the rollout on schedule on July1, 2017 itself was an achievement, the implementation challenges faced by businesses were significant.

Implementation challenges

At the outset, the multiple changes in the rates on many products made it very difficult for businesses to plan supplies, inventory and pricing. Several products, including toothpaste, soap, shampoo and chocolates, which were earlier taxed at a combined level of 27.69 per cent (12.5 per cent excise and 13.5 per cent VAT) and which were initially kept at the “nearest” rate of 28 per cent, were reduced to 18 per cent. 

While this should have turned out as a bonanza for consumers, the government had to intervene and invoke the anti-profiteering provisions of the law to ensure that the rate reductions were passed on to consumers. The upside of the rate reductions was that unlike many other countries, in India, we did not encounter any retail price inflation that could be attributed to GST.

The frequent changes in the compliance framework, as well as the fact that the entire compliance machinery was dependent on the technology portal, made it difficult for many smaller businesses to grapple with the compliance requirements. The fact that the technology portal was ill-equipped to handle the load during the initial phases led to difficulties for businesses to become compliant and led to frequent demands for extensions of the compliance timelines.

There were also many concerns on the revenue collections during the period November 2017- February 2018, as the revenues took a significant dip during this period. While this was partially due the steep rate cuts announced in November, there was an apprehension that it was also on account of widespread evasion, which led to the introduction of anti-evasion measures such as the E-way bill. 

The way ahead

Going forward, it is expected that the government will make the GST more broad-based by bringing in the petroleum, electricity and real estate sectors under GST. This would make the GST a truly comprehensive tax, covering the major part of the economy and resulting in significant improvements in tax collection by covering more value chains in their entirety. 

Several critical features of the GST — such as invoice matching, reverse charge on transactions with unregistered dealers and so on — are expected to be re-introduced in a phased manner to ensure that all participants in the value chain pay their share of the tax. 

Some important aspects — such as reducing the compliance burden on service providers by having a single-stage framework, having a national-level authority for advance rulings, providing an automated reconciliation mechanism for input tax credits, and expanding the scope of the input tax credit to cover all legitimate business expenditures — are expected to be taken up and discussed in the forthcoming GST Council meetings.

It is also necessary to have a separate compliance framework for SMEs and exporters, and recent discussions around a “modular” return filing mechanism are welcome steps in this direction.

It is essential that future changes to the GST framework, be it compliance or rates, are made keeping in mind that the changes will necessitate corresponding changes in the GST portal — which may need more lead time. The ability to calibrate changes across the legislation and the portal will become one of the key determinants in expanding the tax base by making GST more acceptable.    

The writer is a Partner at Deloitte India. The views expressed here are personal