SHIVANAND PANDIT
“The woods are lovely, dark and deep, But I have promises to keep, And miles to go before I sleep, And miles to go before I sleep…..” these are the lines from the beautiful poem ‘Stopping by Woods by Snowy Evening' by Robert Frost. These lines aptly reflect the journey of the Indian Goods and Services Tax (GST) regime as it celebrates its seventh anniversary on July 1 this year.
Seven years have passed since India undertook a comprehensive overhaul of its indirect tax regime through the introduction of the GST. The journey was marked by significant compromises, particularly between the Union government and hesitant states, with concerns raised about how these compromises might constrain the efficiency gains expected from GST. Over time, it was hoped that structural barriers within the GST framework would be gradually eliminated, paving the way for substantial efficiency improvements. However, reflecting on these seven years and two general elections later, it becomes evident that more concerted efforts are required to address fundamental shortcomings and enhance the effectiveness of the GST system.
At the heart of the GST implementation is the GST Council, a collaborative body comprising finance ministries from both the states and the Union government. This council plays a crucial role in deliberating on policy matters, resolving issues, and charting the course for GST's evolution. Yet, despite its pivotal role, ongoing challenges persist, necessitating continuous refinement and adaptation to meet the evolving needs of India's economic landscape.
A wasted chance
Just days before the seventh anniversary of the GST, the 53rd GST Council meeting convened on June 22, 2024 with a prime opportunity to accelerate reform initiatives aimed at bolstering India's indirect tax framework. With monthly GST collections showing robust growth, there were high hopes that the central government, emboldened by recent electoral success, would advocate significant measures during the meeting. However, the meeting ended up being rather mundane, as the GST Council primarily concentrated on sector-specific measures with only superficial effects. The Council once again put off addressing detailed inquiries regarding GST improvements to future meetings.
It is not to imply that it didn't accomplish significant work. Union Finance Minister Nirmala Sitharaman highlighted key strides made by the GST Council, including reforms in challenging demand notices and appeals and enhancing compliance mechanisms. Notably, non-fraudulent cases will no longer incur interest or penalties, and government departments won't automatically appeal adverse judgments to higher courts, instead adhering to revised monetary limits. With nearly 2% of assessments under dispute, these reforms are crucial. It approved numerous procedural and compliance-related issues aimed at providing essential clarity and relief to the industry and taxpayers. The decisions to extend the due date for input tax credit, revise monetary limits for filing appeals at the GST Appellate Tribunal, reduce pre-deposit requirements for appeals, and introduce a sunset clause for anti-profiteering provisions are being viewed positively as measures beneficial to trade and industry.
While the finance minister aims to simplify GST compliance and reduce burdens for the assesses, effective reform across broader areas remains essential. Without comprehensive reforms, GST payees and the entire indirect tax framework are likely to encounter persistent challenges. The need to issue tax demand notices stems from the exploitation of loopholes by dishonest entities or ambiguities in laws that leave room for interpretation, leading to potential misuse of the tax system. Simplifying the tax structure by reducing the number of tax brackets and extending its coverage to all goods and services could potentially enhance the robustness of the GST system, aiming for greater resilience against misuse and ensuring more effective tax administration.
It is shocking that, despite extensive discussions over a significant period, the issue of rate rationalisation remains unresolved. Nearly three years ago, a group of ministers (GoM) led by then Karnataka Chief Minister Basavaraj Bommai was formed to recommend ways to simplify the GST rate structure. In 2022, the GoM submitted an interim report, but there has been little follow-up since then.
The issue of rate rationalization is undeniably complex, influenced by political pressures and revenue concerns. However, these challenges should not be used as excuses to delay addressing such a critical matter. The entire purpose of the GST is being compromised by maintaining a multiple-rate structure. Following this year's Lok Sabha election and the increasing prominence of coalition politics, the task for the GoM on rate rationalisation might become more challenging, reducing the likelihood of a swift positive outcome.
The indirect tax system was initially intended to have a single rate to ensure clarity and efficiency. However, multiple rates were implemented, leading the GST Council to frequently adjust these rates in a populist fashion. For example, in the last meeting, the rate for packing boxes was reduced from 18% to 12%. These adjustments encourage rent-seeking behaviour and consume the Council's time unnecessarily.
In addition to rate rationalisation, the inclusion of fuels, especially petrol and diesel, under the GST framework is a sensitive issue that requires serious attention. A swift resolution is not anticipated. There was anticipation that the 53rd GST Council meeting might address the issue of GST on natural gas and aviation turbine fuel (ATF), which are seen as low-impact items. Even starting a discussion on these fuels would have indicated the Council's intention to impose a uniform tax on them. However, this did not happen. Reiterating her previous stance, the finance minister stated after the meeting that the responsibility now lies with the states. Although the GST was designed to embody the essence of cooperative federalism, the council's operations over the years highlight the challenges posed by India's complex federal framework.
The issue of the compensation cess following the COVID-19 pandemic exemplifies how this levy nearly caused the GST structure to collapse. An even more contentious issue is the handling of the GST compensation cess surplus, which may reach up to 70,000 crore rupees. This cess is imposed on “sin goods,” such as tobacco and luxury cars. Originally, the cess was intended to repay loans taken on behalf of states during the pandemic. However, a significant surplus is now expected. Deliberations on its use have been deferred. While it's natural to debate the allocation of this windfall, it should not impede or overshadow critical discussions on broader GST reforms. During the press conference after the meeting, the finance minister mentioned that many issues couldn't be addressed due to a lack of time. This raises the question: why couldn't the GST Council allocate more time to discuss these crucial matters?
The introduction of the GST has undeniably established a solid foundation for a dynamic Indian economy. To further strengthen the indirect tax structure, it is essential to focus on rate rationalisation, a liberalised credit regime, and a mature dispute resolution mechanism. Given the complexity of these issues, the GST Council must meet more frequently, allowing sufficient time for in-depth discussions and effective resolutions. GST promised to simplify tax administration, but it has not fully delivered. It's time to reconsider and reform its foundational structure. Questioning the necessity of maintaining dual GST structures at both state and central levels is crucial for streamlining indirect taxes.
In conclusion, the Indian government and tax authorities must commit to robustly reforming the GST system, a crucial step in the extensive transformation of the nation's indirect tax landscape. Drawing lessons from the past seven years, it is essential to bridge the remaining gaps between aspirations and achievements, thereby advancing the modernization of the tax framework and bolstering India's ranking in the Ease of Doing Business index. Simplifying the structure of indirect taxes is pivotal for India as it strives to position itself among the top three global economies well before the decade's conclusion. As Winton Churchill remarked ‘Success is not final, failure is not fatal; it is the courage to continue that counts!'
The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com or 9822983420
