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GST: Work in progress so far

Post its implementation, the government has made numerous changes to the various provisions pertaining to GST. However, the business community, particularly the SMEs in the domain of exports, are yet to be pacified.

It’s almost six months since the rollout of the India’s most ambitious tax reform – the Goods and Services Tax (GST). An indirect form of tax, in theory it is meant to simplify things and bring down prices of goods and services by doing away with the existing plethora of taxes. It is also expected to facilitate seamless interstate trade by eliminating taxes on goods every time they cross state borders.

The main reason for ushering it in is to make it easier for organisations to do business in India, improve compliance and spur sales, all of which will eventually fuel the economy.

But our version of GST is a far cry from an ideal one typically having a single, low rate for all goods and services. Instead revenue and inflation concerns, coupled with wide income disparity, has led to four different slabs of 5, 12, 18 and 28 percent. And the highest slab of 28 percent is also the steepest in the world.

Apart from that, there have been initial hiccups too post rollout that have added anxiety over expectations. So much so, the GST, along with demonetisation and a few other things, have been blamed for slowing the economic growth in the nation in the first quarter of the current fiscal year.

Jumping at the opportunity, opposition Congress leader Rahul Gandhi labelled it as Gabbar Singh Tax (Gabbar Singh was the notorious celluloid bandit Gabbar Singh, featuring in cult movie Sholay). Prime Minister Narendra Modi, on the other hand, defended it calling it Good and Simple Tax.

Good or not, successful or not, perhaps, it’s too early to judge.

Meanwhile, the economic growth which took quite a hit on account of the disruption caused by GST seems to be inching back to normal now (the GDP which hit a three-year low of 5.7 percent in the first quarter of fiscal year 2017-18 has increased to 6.3 percent in the second and latest). And in any case most other countries that implemented it, did not witness a smooth transition either.

While we reserve a discussion on whether the ground breaking tax did the economy any good for latter, when it would be more appropriate, here’s a quick look at some of the key developments post its rollout.

Considerable reduction in the number of items fitted in the highest tax slab

Previously more than 200 items attracted the highest GST of 28 percent. Currently the number stands at just 50. This is a result of the government’s efforts to rationalise the structure of the brand new indirect tax. Realising many items of common use, ranging from chewing gums to detergents, placed in the highest bracket could make them expensive for the general public and thereby hurt demand, it fitted those in the next slab of 18 percent. Ultimately, the highest GST tax bracket will be kept exclusively for luxury goods and so-called sin goods, namely cigarettes, pan masala, aerated drinks, etc.

The government has also removed from the list items made by small and medium enterprises (SMEs) in order not to place a high tax burden on them. Most of them do not have economies of scale and are labour intensive. Besides, they account for a meagre 5 percent of the total indirect tax revenue. Hence the move may not bring down revenue collection.

Another objective of the government going forward is to reduce the number of tax slabs to three from the current four. To that end it plans to merge the two tax rates of 12 and 18 percent.

Formation of National Anti-profiteering Authority (NAA)

To ensure all such rate cuts and overall reduced taxes, resulting from elimination of the cascading effect of taxes and also from removal of limitations on claiming input tax credits, are passed on to public in the form of reduced prices, the government has approved of a board called National Anti-profiteering Authority (NAA). The task of the NAA is to ensure such lowered taxes also result in lower market prices.

In fact, the formation of the body came close on the heels of a dramatic slashing of GST rates for restaurants from 18 percent (AC restaurants) and 12 percent (non-AC restaurants) to a flat 5 percent. This move was necessitated by reports that restaurants were not forwarding the benefits of the input tax credit (ITC) received to its consumers.

For the uninitiated, an input tax credit allows manufacturers and service providers to lessen their tax burden, by enabling them to claim taxes they have already paid on purchase of various inputs. In this way GST is able to bring down the tax on tax effect.

However, even post reduction of rates, many prominent restaurant brands are charging like before. They are justifying their move by saying that their material cost has gone up with the government denying them input tax credit (the government not just slashed GST to 5 percent for them but also disallowed them to claim ITC). But tax experts point out that the loss on account of input tax credit to restaurants is far less than what they are charging to make up for it.

Impact on small businesses

GST is proving to be complex, at least for most small businesses. From the basic registration to filing three returns a month and complex refund rules, such entities are finding it tough to make sense of the new tax regime. And they find it expensive to hire chartered accountants to work out the tax for them. Moreover everything has to be done online which is another headache for SMEs, let alone the initial technical glitches in the system.

To make it easier for them (companies having an annual turnover of up to Rs.1.5 crore), the government has made return filings quarterly, instead of monthly.

Working capital blockage

Another issue faced by organisations, particularly the SMEs, has been crunch in working capital owing to the provision of paying GST on advances received for supplying goods in future. Realising their pain, the government removed the provision asking businesses to pay central GST (CGST) at the time of supply.

Refund issues

Working capital of businesses has also got stuck, with the government yet to figure out means to refund extra tax paid by traders. This is particularly affecting exporters, since they have to pay GST right at the start for the inputs they buy from their suppliers. Refunds are also getting postponed along with deadlines for the filing of returns being constantly pushed back.

This has negatively impacted labour intensive sectors such as garments, gems and jewellery, handicrafts, etc. which are finding it difficult to take new orders.

Realising it is important to head off any barriers to exports for the economy which is not much being fuelled by domestic demand, the government just announced a booster dose to the tune of Rs.8, 450 crore for the sector. However, all such efforts are a long way from bearing fruit. As of now, exporters are still grumbling.