New provisions will hurt the GST system
Goods and services tax (GST), one of the biggest reforms in recent decades, will complete five years in July next year. It was expected that after some initial implementation difficulties, the system would stabilise and boost revenue collection along with output. But that doesn’t seem to be happening for a variety of reasons. While revenue collection has improved, partly because of better compliance, it is still considerably below potential. Despite the given state of affairs, some new provisions that will come into force on January 1 could further affect the GST system. According to one provision, the members of clubs, associations, and societies would be liable to pay GST on fees from July 1, 2017. Experts believe this will lead to litigation, particularly because of its retrospective enforcement. There are court orders from the pre-GST period that exempted such associations from service tax on the principle of mutuality.
Another provision that will come into effect from the beginning of next year would empower tax officials to visit the premises of businesses to collect tax in the case of a discrepancy in filings. In the GST system, companies with a turnover of more than Rs 5 crore have to file two sets of returns. The first shows the invoices of its sales, and the second declares the tax liability. In the case of a discrepancy, the government will now make the recovery directly without issuing any notice. It is being argued that since it is the taxpayer’s liability, which has not been paid, there is no need to issue notice. This new system is absolutely unwarranted and will have unintended consequences.
There is no harm in continuing with the system of issuing notices to firms that have not cleared their dues. If a company is unable to explain the discrepancy in filings in a given timeframe, the tax authority can proceed with penal action. But short-circuiting this process will only create complications. Arguably, the provision has been introduced to curb fake billing. There is no dispute that fake billing and the issue of tax evasion must be addressed. But giving tax officials the powers to make direct recovery will inevitably result in harassment. This will also go against the stated objective of the government to increase the ease of doing business in the country and will bring back the fears of inspector raj. Business establishments would constantly live under the fear of tax officials knocking on their door. It’s possible that discrepancies may emerge purely because of technical reasons.
This is also inconsistent with the direction in which the government is moving in the case of direct tax. It is clear that both the Union and the state governments need to work through the GST Council to increase revenue collection. This is particularly important at the current stage because states would lose their guaranteed compensation for the shortfall in revenue collection next year. Enhancing GST revenue would also be critical in addressing the overall fiscal stress in the country, which has significantly been exacerbated because of the pandemic. But this will need a careful assessment of the GST system, not policy adventurism. In this context, the GST Council should expedite addressing the issue of revenue-neutral rates and the inverted duty structure. GST rates were reduced prematurely and need to be corrected to make government finances more stable in the medium to long run. The Council’s recent move on correcting the inverted duty structure for man-made fibres is welcome, but has caused some concern in sections of the industry. It is to be hoped that such concerns should be addressed within the consultation framework of the Council.