Proposed changes in GST will increase friction
The goods and services tax (GST) would soon complete five years. While this milestone will lead to a structural change in terms of compensating states for the shortfall in revenue collection, it would also be an opportunity to thoroughly evaluate the outcomes so far and strengthen the system. The GST was expected to simplify the indirect tax system, improve the ease of doing business, and boost revenue. However, the system has underperformed, partly because of issues related to implementation capabilities. This has resulted in lower than desired revenue collection. Tax collection has also suffered because of a multiplicity of rates, unwarranted rate reduction, and delayed rationalisation of slabs. Lower revenue collection worsened the fiscal position, particularly for the Union government. Although tax collection has improved in recent months, sustainability remains to be seen. The lower overall collection puts pressure on the tax administration and this is reflected in the changes proposed in the Finance Bill, 2022.
The government seeks to amend the Central GST Act to bring fresh restrictions on claiming input tax credit (ITC). The Act already has conditions for claiming the credit, such as the person claiming the credit has the tax invoice issued by a registered supplier, the recipient has received the goods and services, and the supplier has paid the tax due on the supply. The government has proposed to add additional conditions to perhaps check leakages in the system. The GST network will send communication with details of the supplies to the recipient showing where it cannot take ITC. The recipient of supplies will not be able to claim ITC if the supplier has defaulted on taxes, or has paid less than what was due, or if the supplier has taken more credit than what is prescribed.
The proposal has predictably raised concerns among businesses because it will essentially punish the recipient of supplies for the fault of the supplier. Also, it would not be possible for the recipient of the supply to know if the supplier has paid its dues in time or not. This would clearly lead to friction in transactions and affect the way businesses function. This would also defeat the idea of GST where the value chain is expected to be in a position to seamlessly claim ITC, which reduces cascading and increases efficiency. It should be the responsibility of the GST administration to collect taxes and make sure that the ITC claims are according to the rules. The recipient of goods and services cannot be penalised for something that is not in their control.
This could, in fact, lead to litigation and would be a burden for both businesses and the tax administration. This will also go against the overall objective of simplifying the GST structures. The proposal shows that the GST system needs to be strengthened so that taxes are collected in time and the registered entities are not in a position to either evade taxes or claim more credit than what is due. The problem of higher tax credit may also be arising due to multiple slabs and inverted duty structure in some areas, which should be rectified. In this context, it is important that rates and slabs are rationalised as soon as possible. This would make the GST system simpler, which would improve compliance, and boost revenue.