It’s been a year since India’s Prime Minister, Narendra Modi rolled out the Goods and Service Tax (GST), India’s biggest tax reform on July 1, 2017. GST removed the multiple taxes and levies by the Central and the State government and subsumed them under Central GST and State GST with standard rates across the country. It laid the basis for cooperative federalism with the States and the Centre as stakeholders who can’t move independently of each other. In the earlier tax regime, goods moved in India like they were transiting through different countries rather than states under the same federal union.
In the first financial year (FY18) of its launch, GST collections averaged Rs.896 bn (AU$17.9 bn) per month (from Aug to Mar’18), collecting a total of Rs.7.41 tn (AU$148.2 bn) for the nine-month period ended 31st March 2018. In FY 19, GST collections touched a record high of Rs1.03 tn (AU$20.6 bn) in Apr’18 (potentially due to payment of tax arears) and settled back to Rs.940 bn (AU$18.8 bn) in May’18 and Rs.956 bn (AU$19.1 bn) in Jun’18.
The introduction of e-way bill from April 1, 2018 and its gradual implementation across all States by June 1st, 2018 (as part of the GST rollout) is expected to improve the buoyancy in GST collection, helping the government achieve its FY19 GST collection target of Rs.13 tn (AU$260 bn). The e-way bill system is one of the anti-evasion features of the Goods and Services Tax that is expected to prevent manipulation of the value of goods transported. The e-way bill is expected to become a deterrent for tax evaders looking to keep transactions completely off books or to under-report turnover. Further, other anti-evasion measures like invoice matching with improved tax return forms, introduction of reverse charge mechanism and the requirement for some taxpayers to withhold tax while making payments are expected to further shore up the anti-evasion architecture and boost GST collections. Reverse charge is a mechanism through which large registered firms have to pay tax for purchases from small unregistered firms.
The introduction of GST in India, a large economy with 29 different states and 7 union territories with a multitude of taxes and levies (about 40) and multiple set of laws was probably one of the most complex tax reforms undertaken anywhere in the world. Undoubtedly, a reform of this magnitude will not be without its share of implementation challenges. Some of the key challenges were:
- Complex return filing procedure: The complex initial procedure of mandatory filing of three returns every month by businesses, apart from an annual return. This was brought down to one return per month, but still many small businesses find it extremely difficult to comply and their cost of operations has gone up.
- System issues and complex rules for transitioning of credit: Credit to be transitioned under the earlier tax regime had one set of rules for tax transition and another set of rules for cess transition leading to a lot of difficulties for businesses. Further, the Tran 1 form underwent lot of challenges due to system related issues that took a period of 3 months for the tax authorities to fix and allow transition credit.
- Complex refund procedure & system glitches: Refund claim was also challenging initially due to a complex procedure for filling the returns online and comparing the data with the refund claim. Mistakes in filling of returns due to lack of clarity and non- functioning of the refund portal led to delays in processing of refunds initially, increasing the working capital cycle for businesses
- Requirement to file separate return in each state: Another challenge especially for businesses operating in multiple states (like Banks and Telecom companies) have been necessity to file separate returns for each state. While the incidence of tax paid remains same, the cost of compliance increases significantly due to the requirement of separate return filing for each state. A central filing procedure for such businesses with the system bifurcating the revenue share for each state would have been beneficial to businesses.
- Need for balancing people’s expectations: Make people believe that the GST rates are indeed revenue neutral as promised, necessitating a need to cut taxes of several products and services from 28% to 18% and 18% to 5% in Nov’17 and again in Jan’18. For example, FMCG products in the earlier tax regime attracted an excise duty of 12.5% and a VAT of 13.5% resulting in an effective tax rate of 27.7%. The excise duty though was invisible to the consumer, so when a neutral GST rate of 28% was imposed on some FMCG products, the consumer was comparing it with the 13.5% VAT rate thus resulting in a dissonance in the mind of the consumer.
- Supply chain imbalance due to mid-course rate reduction: The above rate reductions were good from a business stand point as well as from the governments stand point. This though created supply chain inefficiencies as part of the inventory was at higher tax rates and hence a challenge for most business to manage.
While there have been many challenges and some serious implementation issues, the administrative will and flexibility to address most of these, with the Central and State government in India working together in the GST council, has been very good. Since its launch on July 1 last year, India’s Goods and Services Tax regime has evolved significantly. During this period tax authorities in India were accommodative and pushed returns filing deadlines till most tax payers got a hang of the system and the GST network could augment its capacity.
India’s GST rollout is undoubtedly a remarkable achievement particularly since it is the by-product of a rare political consensus in India and was implemented without any inflationary impact. A stringent and detailed anti-profiteering mechanism ensured that the inflationary impact of the new tax regime was minimal by passing all the benefits accruing from GST to the consumers. The efforts of the Central and State governments and its administrative machinery for achieving the successful transition was commendable.
Despite its initial glitches, the new tax regime has taken firm root and is altering the economic landscape in India positively. The best sign of this is the entry of over 4.5 million entities in the country’s tax net, many of which would have so far been part of the cash-driven, informal economy. The initial adjustment period for some of these businesses (especially smaller enterprises) though was tough as operating in the new environment increased the cost of doing business. For some, thriving on the tax arbitrage, life post GST got tough, resulting in job losses for a large segment of India’s unorganised sector. Compliant businesses though prospered under the new regime. Some of the key visible benefits of GST are;
- Significantly reduced time and cost of interstate movement of goods due to a uniform tax structure and introduction of the e-way bill.
- Lowered one-to-one interaction with tax officials, improving ease of doing business
- Migrated cash-driven informal transactions into the formal economy boosting government indirect tax revenues. This expansion of the tax net will also help increase direct tax collections.
- Made the economy more efficient by ensuring compliance through a consumption-based tax, linking the entire supply chain beginning with the producer and culminating in the consumer. For seamless functioning and claiming of input tax credit, the complete supply chain must be part of the GST framework.
- The e-way bill and other anti-evasion measures taken under the GST regime stopped the age-old practise of paying low or no taxes (by under reporting), while moving goods across state borders by conniving with intra-state check post officials
- Last but not the least, GST will provide a boost to consumption due to lower tax incidence on many consumption items.
Overall, we believe that GST in India is off to a good start but is still a work in progress. The GST council in its second year will need to improve tax payer’s woes by further simplifying the return form and improving the technology interface. It will have to think about providing earlier promised exemption for digital payments with a view to increase the number of transactions done digitally. The council will also need to work on a road map to bring excluded products like petroleum, real estate, electricity and alcohol under the ambit of GST. Considering India’s national elections in 2019, the government may be tempted to take a few populist steps ahead of the elections, especially considering the fact that demonetisation and GST has led to unemployment in the unorganised sector. Such steps, if any will be detrimental to India’s fiscal consolidation roadmap.