By Sumit Dutt Majumder
There were certain basic objectives of introduction of GST. One was to substantially reduce, if not eliminate, the cascading of taxes by providing seamless flow of input tax credit in the entire supply chain. The second aim was to cut down the compliance costs by clubbing together seventeen indirect taxes of Center and States like Central Excise, Service Tax, and State VAT etc. These two targets have been achieved substantially, except that five Petroleum products and Alcohol for human consumption could not be brought within GST. The third aim was to reduce the logistics and transportation costs.
In the pre-GST era, worst thing was the Central Sales Tax (CST) for inter-state trade because CST could not be taken as credit and hence was a cost that was added to the value of goods. Therefore, often there was a business compulsion for tax-avoidance or tax-planning by having warehouses at different states to facilitate ‘stock transfer’, since stock transfer was not a sale and hence did not attract CST. In the GST regime, there was no such need since the Integrated GST (IGST) for inter-state trade provided credit facility. This started the process of consolidation of warehouses and consequent savings on cost.
The other disruption was stoppage of trucks, examination of goods and collection of Entry Tax or Octroi at the inter-state check posts. This led to delays and malpractices, thus adding to costs. Abolition of Entry Tax and imposition of same rate of State GST (SGST) for a particular commodity across the states made these routine checks unnecessary and hence the check posts were abolished. Consequently, transportation time came down sharply leading to savings.
The fourth aim was to make India a Common Economic Market. In the pre-GST era, India was not a common market; State VAT rates were different in different states. In the GST regime, for one particular commodity, the rate of GST is same across the country. Besides, Entry tax and inter-state check posts were ideas contrary to Common Economic Market. Therefore, one can now look at India as a ‘Common Economic Market’.
The fifth aim that stemmed from the collateral benefit of the structure of GST was to have equitable growth of industry across the country. While some states like Karnatka, Gujarat, Maharshtra etc. were highly industrialised, there were the populous states of Bihar, U.P., Odisha, West Bengal, Kerala etc. that lagged far behind. GST being a destination based consumption tax, in a case of interstate trade the state’s share of GST accrues to the destination state.
Therefore, the destination consumption states like U.P., Bihar etc. will have extra revenue from IGST, besides their own SGST for intra-state trade. Since these states would get richer in revenue, it is expected that this extra revenue would be spent in development of infrastructure and power generation, the two fundamental requirements for industrial growth. Thus, in course of time, all these populous states would also become industrialised, and that would make the program ‘Make in India’ successful. Green shoots are expected in two or three years more.
Talking about the ‘misses’, the first thing that comes in mind is the technology glitches in the initial months of implementation of GST. GST Net, the IT support was to facilitate the administering of certain basic business processes like registration, payment, filing of returns etc. It was also to facilitate invoice uploading and matching of Invoices. It was expected that the GSTN would undergo full scale Test Runs before implementing GST.
However, that was not done. There must have been some compelling reasons for the government to stick to the target date. But, the consequence was that GSTN crashed in the first few weeks of implementation itself. Further, the services of GST Suvidha Providers (GSPs) for helping the Small Business in their interactions with the GSTN was not available. Thus, the experience of the first few months of GST implementation was bitter. A deferment by two months for which there was a window would have helped. Currently, the GSTN has been working well.
As for the policy issues, by and large, these worked out well except for some blunders particularly with regard to the small business. First, the threshold exemption for the small business was lowest in the world at only Rs. 20 lakhs of annual turnover. The idea was to bring maximum number of people within the ambit of GST, and thereby increase the market share of formal economy by reducing that of informal economy. Then, there was a policy decision that there would be no threshold exemption for inter-state supply of goods and services. It meant that the moment someone did inter-state supply like, say, from Okhla in Delhi to Gurgaon in Haryana, he would forfeit the benefit of threshold exemption and he would have to pay GST.
So, most of such small business had to stop inter-state trade, to remain outside GST. But, in the process, they lost business. Their business shrank for another reason-Reverse Charge Mechanism. The registered big businesses were mandated to pay GST and do all compliance requirements on behalf of the unregistered suppliers. So, the registered business stopped transactions with small suppliers. Coming soon after ‘demonetisation’, this broke the backbone of small business. Since the small businesses are estimated to contribute around 75-80% of total employment in the country, this impacted employment sector adversely.
In light of the issues relating to the Small Business and irrational tax structure, there were protests. This compelled the GST Council to undertake a series of course corrections from November end of 2017 onwards. First, the clauses regarding withdrawal of exemption in the case of inter-state supplies of services (not goods) and Reverse Charge Mechanism were suspended. Further, relief was provided by raising the general threshold for exemption from Rs 20 lakhs to Rs. 40 lakhs. Similarly, threshold for Composition Scheme was raised first to Rupees One Crore, and then again to Rs 1.5 crore in January, 2019. The list of items in different slabs of GST were rationalised. Initially, there were more than 250 items in 28% slab. But by January, 2019, it was 28 items only. Many items at 18% and 12% slabs were also brought down to 12% and 5% slabs respectively.
As for the road map, the people’s expectations would be as follows. The clause relating to denial of threshold for inter-state supply of goods may be withdrawn. The clause relating to application of Reverse Charge Mechanism may be dispensed with for purchases from unregistered supplier. While the threshold for Composition levy in respect of goods and services may be different, its rate should be same for both goods and services. Now it is 1% for goods and 6% for services.
These apart, first Petroleum and thereafter Alcohol should be included in GST at the earliest, after the revenue stablises. The tax slabs may be made three by merging the slabs of 18% and 12% somewhere in between. On procedural matters, the revised Returns and the mechanism of Invoice matching should be prioritised. This will help in reducing tax evasion. The intelligence and Enforcement work as well as Scrutiny and Audit will have to be strengthened to gear up sluggish tax collections.
A remarkable feature of GST implementation is that thirty-one States came together with the Centre to from a unique federal body called GST Council which took all the decisions relating to polices and their implementation unanimously without any voting, in the spirit of cooperative federalism. Being an election year, there would be some political compulsions till the elections. Judicious steps after that should stablise GST for the better.
(The writer is former Chairman, Central Board of Excise & Customs and author of three books on GST including ” GST-explained For Common Man“)