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One year of GST: To be a game changer, structural, compliance issues need to be addressed

Seetha

Editor's note: It has been a year since the Narendra Modi government rolled out the Goods and Services Tax (GST), on 1 July, 2017. The introduction of the indirect tax regime marked the end of over a decade of wrangling, when politicians struggled to build consensus across party lines. Firstpost is publishing a series of articles wherein experts will analyse the triumphs and the pitfalls of the roll out of the GST.

On the first birthday of the goods and services tax (GST), with elections less than a year away, it was natural for the government to play the rich-poor card when deflecting criticism on the complicated rate structure.

That is what both Piyush Goyal and Arun Jaitley did at a function to mark the occasion. Goyal said the multiple rate structure kept India's social realities in mind. "Can the tax on a very expensive watch be the same as that on hawaii chappal? Should it be?" he asked. Jaitley also said that India cannot follow the Singapore model where both food and luxury cars were taxed at 7 percent. But this is just trivialising even serious economists who are arguing in favour of lesser slabs. Nobody is saying that Titan's Nebula range of watches should be taxed at the same rate as hawaii chappals. Nobody is arguing that there should be no exemptions at all, especially for items of mass consumption; even countries with a single slab have a list of exemptions, mostly of goods and services consumed by the lower income groups.

The point is that India's four-slab structure (apart from the zero-rated items) is a compliance nightmare and hugely inefficient. A reading of the classification list will make one's head reel with the many conditions for taxing one good at two different rates. The list is replete with such instances. This only encourages €" even facilitates €" evasion and consequent disputes/harassment by tax inspectors.

More importantly, the continued exclusion of petroleum products from GST is leading to the cascading of taxes €" something GST was meant to address. State governments, however, are unwilling to bring these into the GST net, fearing loss of revenue if they are brought into the discipline of GST. Anil Khaitan, president of the PHD Chambers of Commerce and Industry (PHDCCI) suggested that aviation fuel and natural gas could be brought under GST, to start with. How the GST Council responds to this suggestion remains to be seen.

In his speech, Goyal referred to chief economic advisor Arvind Subramanian's 2015 report on revenue neutral rate and structure of rates for GST recommending a 15.5 percent revenue neutral rate. But for GST, the report spoke about a 12 percent low rate, an 18 percent standard rate and a 40 percent demerit rate. In interviews following the announcement of his leaving the finance ministry, Subramanian has spoken about the need for one standard rate and one high rate.

There is no getting away from the fact that India's current GST structure is extremely flawed. The four-slab structure has to give way to a maximum of two. For this to happen, some items currently in the lower slab will need to be taxed at higher rates, even as some currently taxed at high rates attract low rates. Unfortunately, given the rich-poor rhetoric that is being thrown around, this seems unlikely to happen €" at least till the middle of 2019.

If politics is going to determine the course of GST, then the GST Council should perhaps turn its attention to the problems of the micro small and medium enterprise (MSME) segment. The size of this segment makes it politically significant. Though many of the compliance-related issues affecting this group have been addressed, Dinesh Chandra Tripathi, president of the Federation of Indian Micro Small and Medium Enterprises (FISME) was bold enough to move away from the largely congratulatory tone of speeches at the function to highlight two problems.

One, GST is putting pressure on working capital needs of MSME firms. They have to deposit GST as soon as they have billed their customers, even though in business to business transactions, the payments come after at least a couple of months. This leads to delays in the repayment of loans taken from banks, which gets them put into the special mentions accounts list and later NPA list, squeezing them even further.

Two, input tax credit is not allowed on a large number of legitimate expenses incurred by firms, including stay in hotels and taxi expenses incurred by marketing and sales staff and repairs carried out in factories and warehouses. This is not specific to the MSME sector €" it applies to large firms as well €" but it puts a greater burden on cash-starved small firms.

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Jaitley ended his address to the function by saying he has stopped terming GST as a disruptive reform because the changeover in India has been relatively smooth, compared to other countries. He has a point. The GST Council has been quite responsive in addressing issues related to rates as well as compliance procedures to make things easy. But if he is serious about GST being a game-changer, issues related to the structure and compliance will need to be addressed pro-actively.

(The writer is a senior journalist and author. She tweets at @soorpanakha)

Read the other articles from the series here: 

One year of GST: Council now needs to bridge existing gaps to improve ease of doing business countrywide

One year of GST: It's been a bumpy ride for the restaurant industry over the past 12 months

One year of GST: Indirect tax regime is a great success; has led to growth in GDP, says Adi Godrej

One year of GST: Tax regime is anything but good and simple; govt can simplify it to improve ease of doing business

One year of GST: Integration of unorganised sector is major achievement; govt must ensure transmission of lower taxes to consumers

One year of GST: Government could push a raft of anti-evasion measures if compliance or collections dip

One year of GST: The tax regime is helping reduce shady realty transactions, but property prices aren't down

One year of GST: The roller-coaster ride is over and businesses are now prepping to switch to cruise control

One year of GST: With compliance at 69%, tax collections have begun to stabilise; time to make process smooth

Also See: One year of GST: Council now needs to bridge existing gaps to improve ease of doing business countrywide

GST anniversary: Narendra Modi rules out single rate under scheme, says Mercedes and milk cannot have same tax

GST anniversary: Arun Jaitley makes first public address in two months, says best of scheme yet to come

Read more on Business by Firstpost.