With complications whittled down, the GST system has come of age

The GST Council will meet today. Something has been happening over the 42 previous meetings that has escaped the notice of most people: the new tax has settled down. 

True, there are still a lot of niggling issues. But the major pain points have been mostly addressed. 

The biggest problem was the compliance burden. There were too many forms that needed to be filed too often. Over the years, the forms have been simplified significantly, with most people having to file just a summary GSTR-3B form regularly. 

But this simplification itself had come with its own set of problems. By allowing people to provide less information in their forms, and allowing them to self-attest a lot of it, the GST Council had weakened the overall system because one of the strengths of the system was the input tax credit framework  which drastically cut down the scope for evasion. Allowing companies to provide estimates of the credit they were due was, thus, a weakening of the system. 

Now, however, the Council has taken the best of both aspects -- simplicity coupled with robustness -- and applied it in its new approach which will kick off from January 1, 2021. 

The new system will have auto-filled forms populated with information from the taxpayer and his suppliers. The GST Council gave everybody enough time to get used to the idea of matching invoice information. It will soon be put into action. 

IT infrastructure

The next major pain point was the IT infrastructure behind GST. When GST was introduced in 2017, eligible filers had a single deadline before which they had to file their returns. The eligibility criteria of who had to file was also stricter than it is now. 

This, coupled with the Indian propensity to do things only at the very last moment, we got the perfect recipe for taking down even the most robust of servers -- which the GST Network didn’t have, anyway. 

But even if it had had them it wouldn’t have helped. The sheer volume of filers when the deadline came each month was simply too great. 

Thankfully  the IT infrastructure has been made more robust now. It has also been ensured that fewer people need to file at any given point. The GST Network can now handle more simultaneous filers than ever before. By some estimates, that’s about 300,000 filers per second!

Several other changes have also reduced the number of GST filers at any single point of time. From April 1, 2019 onwards, only those businesses with an annual turnover of more than Rs 40 lakh needed to register under GST and file returns. 

This limit was previously only Rs 20 lakh. This move immediately has vastly reduced the load on the GST Network. 

Then, earlier this year, it was announced that the deadlines for filing returns would be staggered such that companies with different levels of turnover filed returns on different dates. This further eased the load. 

Finally, as the 42nd GST Council meeting recently decided, those earning less than Rs 5 crore a year could file quarterly returns instead of monthly returns.

Compensation issue

The third major issue, which is ongoing is the compensation problem. After having promised to compensate the states for losses in revenue arising out of the implementation of GST for five years, the Centre is now in a bind because nobody could have planned for Covid-19.

The GST Council meeting today will hopefully reach a decision on what to do. 21 States and UTs have taken one of the two choices presented by the Centre.

The remaining States are yet to communicate their decision. Most of them are Opposition-ruled, so it’s unlikely that the Centre is holding its breath.

We may, for the second time ever, see the GST Council vote on an issue. Whether the compensation issue is decided unanimously or through a vote, it’s clear that the precedent has been set in case such a scenario repeats itself in the next couple of years. In any case, since compensation was for only the first five years, it’s an issue that will soon disappear. 

The rates problem

The last major issue facing the GST system is the most intractable: the multiplicity of rates. The current GST set up has five major rate slabs, including the zero rate.

The Council has systematically been bringing items out of the 28 percent slab. What remains in that slab are not items of mass consumption  --  cars, cigarettes, and cement. 

For all practical purposes there are four slabs now, which is still two slabs too many. This is a medium term problem that will get solved in the next two years as the GST Council goes for a single standard rate, with one higher rate and one lower rate. 

The zero could be an additional rate. But the more items that are placed in it the more the items that will have to be in the higher slabs. Populism always extracts a price from everyone except the populists.

Twitter: @tca_tca