Having multiple GST rates not only leads to complexities in compliance and tax structure, but also does not optically make India tax-friendly and competitive globally
Union Finance Minister Nirmala Sitharaman will present the third Union Budget of Modi government 2.0 on February 1, 2021. While the Indian economy has started to show signs of revival amid the ongoing Covid-19 pandemic, India Inc is waiting to see how the government will strike a balance between providing necessary fiscal stimuli by increasing expenditure in critical areas on the one hand and provide incentives/tax cuts to boost industry sentiment on the other. More than three years from the launch of the Goods and Services Tax (GST), there are still numerous issues affecting both small and large businesses which are expected to be ironed out.
GST was introduced with the primary theory of ‘one nation, one tax’. Currently, GST is levied at different rates – 0.25 per cent, 1 per cent, 3 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent. Having multiple GST rates not only leads to complexities in compliance and tax structure, but also does not optically make India tax-friendly and competitive globally. While this issue has been discussed at various forums, it needs to be seen if the government will cede to demands of stakeholders and rationalise the tax rates to fewer slabs in view of the existing economic situation and revenue pressure.
Inclusion of petroleum products under the GST ambit has been another demand of the industry for a very long time after the implementation of GST. However, there seems to be no movement on this front. Being still kept out of the GST net, while keeping states’ revenue interest in place, the retail petroleum prices in India include ~70 per cent taxes (central and state) which leads to a significant additional cost in the overall production cost for almost all manufacturing activities. Inclusion of petroleum products in the GST regime would not only rationalise the tax structure but could also lead to a reduction in overall logistics and distribution costs of most products and services.
In addition, industry also expects further rationalisation measures in terms of input credit eligibility on all activities having direct or indirect business nexus. Also, to ensure absolute compliance and prevent unwanted litigation, clarity is required on some ambiguous issues in the context of what constitutes ‘supply’ which continue to exist under GST such as taxation of intra-office cross charge, employer employee activities, activities undertaken by not for profit sector etc. Lastly, applicable methodology and uniform procedure for adherence to anti-profiteering provisions has been a subject matter of debate ever since the GST was introduced, not only leading to adverse findings but also strong opposition by taxpayers demanding legality of the said provisions at a judicial level. While these provisions have been extended until March 2021, addressing these issues immediately would better compliance and prevent unwanted harassment and litigation.
Ease of doing business
‘Ease of doing business in India’ has been the cornerstone of Indian economic policies for years. However, rapid changes in GST law such as mandatory e-invoicing, launch of new-return formats, ever-changing due-dates, tax rate changes, frequent notifications amending procedure for filing GST refunds etc are keeping taxpayers on their toes when it comes to compliance. Therefore, to alleviate this stress, the government should launch major amendments and policy decisions in the Union Budget so that industries can focus on their core business functions and plan better.
On the Customs front, since a major portion of global trade is carried out by related parties, ‘special’ care needs to be taken for such transactions. Unfortunately, the Special Valuation Branch (SVB) is burdened with a large backlog of cases and provisional assessments appear to be pending finality for long period of time. This can only be resolved through greater staffing and rigorous administration.
Further, industry wants that requirement of extra duty deposit during pendency of proceedings should be dispensed with entirely, where they have met with requisite submissions and prescribed valuation conditions in a timebound manner as the same leads to blockage of working capital for an indefinite period thus adversely impacting the businesses.
Key sectors’ demands
Major issue faced by the Indian healthcare sector is unavailability of input tax credits. While the nation’s Covid-19 frontline warriors are working day and night to curb the pandemic, proper healthcare in India still remains out of reach for many. This is primarily because healthcare services are exempted under the GST regime (as was in the erstwhile service tax regime) leading to GST paid on procurements of input, input services and capital goods seeping into the cost of healthcare services. It is expected from the government to either ‘zero rate’ or propose a lower rate of GST @ 5% for healthcare services with full eligibility of input tax credit.
Another expectation from pharmaceutical giants is a reduction in GST rates for clinical trials. Currently, clinical trial services are levied GST @ 18%. While the pharma industry has been lobbying for a reduction in the rate of tax for past many years, the pandemic and international effort to search for vaccine may just prove to be the silver bullet and compel the government reduce the rate of tax so as to motivate pharma companies to complete the tall order of finding a cure.
The tourism and hospitality sector has taken a massive hit during these uncertain times. While the sector is now gradually reviving for a majority of players, it is still far from standing on its own two feet. In order to extend a helping hand to these highly advertised sectors, the government may consider taking a cue from its neighbour – Malaysia which has provided exempted hotel accommodation from service tax for a 6-month period. This out-of-the-box measure resulted in hotel prices falling ~15% which attracted massive footfall thereby giving a boost to the struggling industry. Another cue can be taken from ‘Eat Out to Help Out’ (EOHO) scheme launched by the United Kingdom government to encourage consumption. The scheme provides 50% discount at registered restaurants (with a ceiling cap) to attract people from stepping out again and spend money to revive the businesses. Restaurants registering for EOHO can claim discount given to customers under scheme as a refund from the government. Similar steps, if taken with due protocols, will definitely prove to be a healing touch which is required at this time for this sector.
Many sectors continue to face challenges on account of non-eligibility of refund of GST in cases of inverted duty structure. This issue persists across sectors such as textiles, railways, mobile phones, fertilisers and footwear. Such a refund arises when tax rate on outward supplies are lower than the rates on inward supplies leading to perpetual accumulation of input tax credit and hence blockage of working capital of the industries. Provisions of GST law do not allow a refund of accumulated input tax credit of input services procured while filing a refund application under inverted duty structure. This results in blockage of such credit of input services with the businesses leading to huge working capital limitations. Alleviating this would not only allow access to blocked funds to business houses, it will also lead to a greater ‘ease of doing business’ in India which is one of the major poll promise of the current NDA government.
We are just a couple of months away from the Budget and the Ministry of Finance has already begun its pre-budget consultations with stakeholder groups. Budget 2021 could be decisive as a roadmap for consolidation and recovery and for uplifting the overall business sentiment. While decisions on critical issues concerning GST are made through the GST Council, Budget is the right opportunity to make some concrete positive announcements at one place signaling government’s intent by addressing pain points of industry. This would unleash renewed enthusiasm in businesses and also give a much needed positive thrust to the economy as well as consumers.
The authors are partners at Grant Thornton Bharat LLP. Views expressed are personal. They do not reflect the view/s of Business Standard
With contributions from Pragya Sharma (Manager) and Aditya Jain (Assistant Manager) at Grant Thornton Bharat LLP