Next steps for GST

Administrative and policy interventions needed

After six years of implementation, the goods and services tax (GST) system seems to have stabilised, with monthly revenues of at least Rs 1.5 trillion. The system has benefited from constant fine-tuning by tax authorities and coordination between the Union and the states. A number of interventions over the years, such as the introduction of e-way bills and the use of e-invoice, have improved efficiency. The use of technology has been a key enabler. The audit of returns, for instance, is not at the discretion of tax officers; instead, the selection is done by algorithms. This ensures honest taxpayers are not harassed by the tax administration. The use of technology in filing and administration has significantly increased compliance. However, despite the achievements of the past six years, the GST system is still a work in progress, and several aspects of it need to be fixed.

As Central Board of Indirect Taxes and Customs Chairman Vivek Johri said last week, a special drive by tax officials found about 60,000 suspicious entities. After verifying 50,000 of those, it was found that about 25 per cent were bogus. In this context, the administration is planning to introduce biometric authentication along with geo-tagging to strengthen the system. It has started a pilot project for geo-tagging addresses for the exact location, and, depending on the experience, it may decide to implement it on scale. Some service entities that use co-working spaces are reported to have made representations because they may face difficulties. The GST administration is also adopting biometric authentication to determine whose Aadhaar is being used. The tax authorities have found a number of instances of fake input tax credit claims. GST officials in recent months, for example, are reported to have busted over 300 syndicates with estimated fake input tax credit claims of about Rs 25,000 crore. The administration must be commended for identifying unscrupulous elements in the system and moving forward to plug the loopholes. In this regard, it is worth noting that new systems or changes in tax administration should aim to keep the compliance burden to a minimum and enable registered entities to focus more on businesses.

Broadly, the GST administration will need to work on two levels to further improve the system and enhance revenue collection. First, there is a need for strengthening supervision in a sustained manner to check tax evasion and fraudulent claims of input tax credit. The second level of intervention would have to be made by the GST Council. Although revenue collection has improved in recent years, the system is far from what had been initially envisaged. Estimated GST collection in 2022-23 was 6.65 per cent of gross domestic product, which was only marginally better than the 6.3 per cent collected in 2016-17 from taxes subsumed under GST. Also, collection could suffer once the extended compensation cess comes to an end. Therefore, it is important that the GST Council addresses the long-pending issue of rationalising both rates and slabs. Reducing the number of slabs, along with adjustments in rates, will improve efficiency and collection. Overall, while administrative changes to check fraudulent activity will help, fully realising the system’s potential will depend on policy interventions to simplify the tax system.