It is five years since India transited into the “One Nation- One Tax” Goods and Service tax framework. The GST regime was billed to be a ‘game-changer’, at the time of its introduction, to revitalize the indirect tax administration in the country and over four years, it has managed to chart certain milestones billed in its initial purpose. To wit, this single framework has mostly done away with the cascading effect of taxes, bought compliance into a single fold and has functionally introduced the use of automation and technology in tax administration.
However, there have been trade-offs in this journey. Use of automation has been riddled with well-documented technical problems; revenue neutrality never achieved [as economic and social realities took precedence]; the adjudication mechanism has still not been fully established [there are still no GST tribunals for appeals]; and inherent suspicion of tax evasion has made the system a rigorous ordeal at every step for the taxpayer.
There is room for improvement as the regime is navigating through adolescence. One of the keys to improvement is the proposal of the tax slab rationalization. To this end, the GST Council had formed an empowered group of ministers to suggest ways to boost revenues and rationalise the tax structure, whose report is awaited. There have been murmurs of a re-jig in tax slabs to introduce a 3% and 8% bracket, removing the 5% slab altogether. Speculation is rife that some goods of mass consumption may be moved to the 3% slab and the rest rejigged into an 8% slab. While the movement of goods from the 5% to an 8% slab may yield an increase in revenue, the downward movement to the 3% slab could open the door to increased level of fitment lobbying and identification. What would be the parameters to identify the goods of mass consumption that could be moved? Are milk and tea larger item of mass consumption to move to 3% than hypothetically say, branded cereals or branded wheat or olive oil which can move to 8%? The overall uptick in inflation in the country in also a firm deterrent in tax slab recompilation.
A better option should be a focus on achieving the revenue neutral rate and reduction in the number of slabs [like merging the 12% and 18% slab to a single 15% slab] and/or looking at ways to expand the tax revenue net to include new goods [e.g., tools, agriculture implements etc.] from the exempted categories or new forms of services [fantasy gaming] etc. The inclusion of ATF is also ripe to be considered for a start to include petroleum products.
Modernization and simplification of the input tax credit system is also essential. Presently, input credit can be denied to a purchaser if its supplier fails to file their returns correctly. This puts an undue responsibility on the purchaser to start policing its vendors, which can easily be avoided if the credit is based on records reported by the purchaser. There are also restrictions under GST laws on how much credit can be used to offset output tax liability and a new section has been proposed in the Union Budget 2022 for limiting maximum proportion of output liability through credit. These restrictions create undue hindrance to seamless credit flow and must hasten a re-look to simplify and introduce efficiency.
The ironing out of inequity in the formula for refund due to inverted credit structure, related to input services, was placed in the hands of the GST Council by the Supreme Court. However, there has been no decision on this issue. The distinction between suppliers having higher component of input -goods than those having services continue. This is where modernization should take centre-stage. There is no reason that refund of services should be denied over goods, especially when the Apex Court has remarked that the formula devised may suffer from practical inequity. To develop efficient and tax-payer friendly models, the erasure of such identified glitches, which do not benefit the trade in any way, should be the first weeds that need to be rooted out of the system.
The Central Board of Indirect Tax and Customs (CBIC) has also now proposed to use business intelligence and other enterprise data to start scrutinizing compliances and statutory filings, mainly to curb fake invoicing and tax evasion. A Standard Operating Procedure has been issued to this effect to scrutinize GST returns for 2017-18 and 2018-19 to detect irregularities in compliance. While the use of tax technology and business intelligence is welcome to root out forms of evasion, true efficiency can be achieved when the system is not prohibitively invasive to the actual running of the business. The system needs to be adaptively intelligent, with an ability to sniff out irregularities from available records and be armed to identify business outliers without inconveniencing the entire supply chain or operations.
The evolution of the GST regime is long winding and fraught with challenges, primarily those which must balance an efficient system with effective enforcement. The need of the hour for the Government should be to be adaptive, intelligent and rational in bringing about changes. Unless, these principles are ingrained in the thinking, this regime will be stuck in an endless furrow and be of little help to the taxpayer it seeks to empower.
Contributed by: Rajat Bose, Partner; Neeladri Chakrabarti, Consultant
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