July 1, 2022, marked five years since the iconic Goods and Services Tax (GST) was introduced. Marketed by PM Narendra Modi as ‘One Nation, One Tax, One Market,’ the aim of GST, rolled out on the midnight of July 1, 2017, was to streamline the indirect taxation regime and reduce the compliance burden. The objective behind this reform was to create a unified internal market for goods, services, and capital in India by eliminating the multiplicity of tax rates that existed before GST came into effect. The GST subsumed over 17 central and state taxes such as the excise duty, service duty, VAT and 13 cesses.
With both the Centre and states pooling their powers to bring out the idea of a single tax for the entire nation, the GST is seen as a shining example of cooperative federalism. Further, as per figures quoted by Finance Minister Nirmala Seetharaman, since the introduction of the GST, India has managed to double its tax base in the last five years since it was introduced from 63.9 lakh to over 1.38 crore. The GST collection has also grown phenomenally, rising 28 per cent to Rs 1.49 lakh crore in July 2022, the second-highest level since the record collection of Rs 1.68 lakh crore in April 2022.
The GST may have come a long way since its genesis was laid down in the Union Budget of 2006, but has it achieved all the promises it had set out to bring? To a large extent, yes, is what experts say. Nandakumar Tirumalai, Chief Financial Officer, Tata Chemicals cites increased automation leading to more streamlined processes and the reduction in cascading effects of multiple taxes pre-GST, as one of the biggest benefits of the GST.
GST: The Genesis
The GST (Goods and Services Tax) Act, 2017 was passed by Parliament in 2016. It officially came into force on 1 July 2017 after being ratified by the President of India. On 30 June 2018, a notification was issued by the Ministry of Finance regarding the establishment of a council for implementation issues related to GST. This body had been given exclusive powers to decide rates for all commodities across states without any interference from other government departments such as the Finance Ministry or Law & Justice Ministry. The GST Council has been responsible for setting tax rates at each stage during its implementation process and also deciding whether certain items should be zero-rated or exempt from taxation altogether under certain conditions.
The original plan was to have a single rate. However, the GST Council decided to have a multiple rate structure. The rates were set based on the recommendations of the fitment committee and approved by Parliament in the 2017-18 fiscal year (FY19). The reason for this change was that some states had very low tax bases compared with their population size or economic activity levels, so they would be unable to recover their full share without levying high taxes on consumers.
The GST is broadly divided into these 4 slabs – 5%, 12%, 18%, and 28% for most of the goods and services in the country. Some products and services are exempt from GST like agricultural produce, poultry, newspapers, etc. There is a 3% GST on Gold and 0.25% for semi-precious and rough precious stones.
Impact on Economy
In line with industry expectations, GST has had a positive impact on the manufacturing sector by removing the cascading effect of taxes, resulting in a reduction in manufacturing costs.
As per a report by Deloitte, around 90 per cent of the Industry feels that GST has improved the ease of doing business in the country, by bringing down barriers, helping companies optimise their supply chains and positively affecting the prices and costs of goods and services for the end consumer. Further, India’s official ranking in the Ease of Doing Business Index by the World Bank, where paying taxes is a parameter, has witnessed a huge jump from 100 in 2018 to 63 in 2022.
Small businesses have largely benefited from GST as it has simplified tax compliance and made it easier to do business. It has also helped them grow by making them more competitive and increasing their efficiency, so they can pass on the benefits of lower prices or better quality of services to their customers.
Due to its implementation, businesses do not have to go through a lengthy process of filing new returns for each product or service, as they did in the pre-GST system. E-Invoicing has helped the tracking of invoices, easy creation of e-way bills (needed for transportation of goods above Rs.50,000/-), reduction of frauds and entry errors, apart from helping curb tax evasion and digitising the whole process.
Rajan Raje, CEO of Nichem Solutions states that GST has helped bring a lot of businesses into the organised segments. “However, while the tax collection has improved, the moderation of tax structure is still missing,” he says.
On its part, the GST Council has notified steps to assist small businesses. This includes waiving the compulsory registration norms for small businesses with annual turnover up to Rs 40 lakh and Rs 20 lakh for goods and services respectively, granting exemption to taxpayers with aggregate turnover of up to Rs 2 crore in 2021-22 from filing annual returns for the FY.
Further, businesses with a turnover of up to Rs 1.5 crores, making e-commerce supplies can opt for a compensation scheme, offering a lower tax rate and ease of compliance. Cash ledger balance can also be transferred from one GST registered entity to another.
Challenges With Compliance Persist
The GST was supposed to be a win-win solution for all stakeholders – from the manufacturers and businesses who would deal with fewer taxes, better transparency and a smoother e-filing system, to the Government who would gain revenue through plugging leaks and the end consumer who would benefit from paying less tax for goods and services.
However, while GST has been in force for five years, businesses are still learning to comply with it. It is a complex tax system that requires a lot of training and resources to understand, let alone implement properly. The GST Council is working hard on improving compliance through regular seminars and workshops so that everyone knows what needs doing and how best they can do it – but given the vastness of the country, it will take time before this happens across all sectors of the economy. Multiple state-level audits of some taxpayers increase the operational complexities and litigation for them.
However, Mr Tirumalai opines that it would be an exaggeration to call the teething issues a failure of GST, which has brought in a mammoth change in the overall economic structure of the country since independence. “Although there were many problems in the journey, those have been addressed by the government continuously, and it would be so going forward as well,” he states.
The Path Ahead
The GST is still a work in progress. However, it was designed by experts with years of experience in tax administration, and it has been implemented by thousands of people who manage successful businesses.
The way ahead, Mr Tirumalai says, should be, “Allowing cross utilisation of GST credit in multiple states of one entity, ensuring honest taxpayers are not denied their right of credit due to non-compliant collectors of GST, and seeing if more articles at present out of GST (nil rated) could bring in either zero-rated category or a minimal rate category so that credit is not lost and hardship to a few industries is minimised, would help.”
Mr Raje adds that moderate tax slabs will encourage unorganised segments to enter the organised business structure. “I believe that moderation will bring in further compliance and the collection may improve. Further, simplified software or a working model is a need too!” he concludes.