Goods & Services Tax (GST) : GST has failed to live up to its full potential?, Advantages and Disadvantages of GST in India

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. In simple words, GST is an indirect tax levied(लगाया) on the supply of goods and services. This law has replaced many indirect tax laws that previously existed in India. "GST is one indirect tax for the entire country." Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. Inter-state sales are chargeable to Integrated GST.

The introduction and implementation of GST was a watershed moment in Indian tax reform, it has changed the way businesses view taxes. The idea behind introducing GST was to simplify the tax regime and to make it more streamlined. The GST aims to widen the tax collection net and make the process business-friendly and conducive to growth.

One of the key assumptions was that the introduction of the GST would raise the share of indirect taxes in the gross domestic product (GDP), and provide the wherewithal(साधन). It hasn’t worked out that way. Central revenue from GST may be anything up to 40 percent short of target this year, and the states are now complaining about non-receipt of their GST share. Pushed to the wall, the government is busy finding ways to pay its bills indirectly, or not pay at all. The Comptroller and Auditor General(CAG) has reported that the actual central deficit is more than 2 percentage points higher than officially stated.

There were four mistakes made on GST-  

First, the political leadership did not realize until quite late in the day that GST is essentially a flat tax, with variations. So all the goods consumed by the poor, and broadly enjoying favorable tax treatment, would now attract a higher tax. Equally, the goods consumed by the wealthy would attract a lower tax. So the poor would end up paying more, and the rich correspondingly less, if the GST rate were revenue-neutral. That led to the first mistake: Going political, and introducing extreme progressivity in GST rates (all the way from zero to 28%). This was GST without the logic of GST.

The second mistake was to promise the states a guaranteed 14% increase in GST revenue from one year to the next. This, when a new monetary policy framework was being put in place for the Reserve Bank, with a target inflation rate of 4% (with 2 percentage point variation on either side). What this meant was that an economy growing at 7% would ordinarily be expected to deliver nominal growth of about 11% — well short of the 14% revenue Excess promised to states. The compensation cess was available to help bridge the gap, but only for five years.

The third mistake was to keep key goods outside the scope of GST (petroleum products, tobacco, liquor). Since these have usually accounted for the bulk of excise revenue, it affected calculations on what a revenue-neutral GST rate might be.

The fourth mistake was the drive by the Modi government to lower the cost of goods in the run-up to the general elections. In the process, the tax rate on many consumption goods was dropped more than the tax rate on their inputs. So we now have companies claiming refunds of taxes on inputs that are more than the GST they pay on their final product!

Meanwhile, in the implementation phase, we have seen a repeat of what happened in the wake of the demonetization three years ago. People found all kinds of creative ways to turn black into white. In the case of GST, we seem to have spawned(पैदा की) a fake-bill industry that provides convenient bills to producers, even as chunks of the production chain seem to have found a way to escape the GST net.

Perhaps GST was too complex a system for the Indian economy at its present stage of development. Regardless, the Centre has to break heads in the GST Council and work out new slabs and rates and make a fresh start. No economy can afford to persist with a tax experiment that has failed.

The journey of GST in India

The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.

What are the components of GST 

There are 3 taxes applicable under this system: CGST, SGST & IGST.

CGST: Collected by the Central Government on an intra-state sale 

SGST: Collected by the State Government on an intra-state sale 

IGST:  Collected by the Central Government for inter-state sale

Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both state and center. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and regulations. Interstate sale of goods was taxed by the Centre. CST (Central State Tax) was applicable in case of interstate sale of goods. Other than above there were many indirect taxes like entertainment tax, octroi(चुंगी), and local tax that was levied by state and center. This led to a lot of overlapping of taxes levied by both state and center.

For example, when goods were manufactured and sold, excise duty was charged by the center. Over and above Excise Duty, VAT was also charged by the State. This leads to a tax on tax also known as the cascading effect of taxes. GST has removed this cascading effect as the tax is calculated only on the value-addition at each stage of the transfer of ownership. This indirect tax system under GST has improved the collection of taxes as well as boosted the development of the Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.

ADVANTAGES OF GST IN INDIA

One of the most significant indirect tax transformations of the country was the Goods and Services Tax. GST benefits in India will assist the Government as well as the consumers in the long run in creating a win-win situation for both. Some of the advantages of GST in India are enlisted as follows:

=> Mitigation of Cascading effect :

Under the GST administration, the final tax would be paid by the consumer for the goods and services purchased. However, there would be an input tax credit structure in place to ensure that there is no slumping of taxes. GST is levied only on the value of the good or service.

=> Abolition of Multiple Layers of Taxation :

One of the advantages of GST is that it integrated different tax lines such as Central Excise, Service Tax, Sales Tax, Luxury Tax, Special Additional Duty of Customs, etc. into one consolidated tax. It prevents multiple tax layers imposed on goods and services.

=> Resourceful Administration by Government :

Previously, the management of indirect taxes was a complicated task for the Government. However, under the GST establishment, the integrated tax rate, simple input of tax credit mechanism and a merged GST Network, where information is available, and administration of resources are well-organized and straightforward for the Government.

=> Enhanced Productivity of Logistics:

the restriction on the inter statement movement of goods has reduced. Earlier logistic companies had to maintain multiple warehouses across the country to avoid state entry taxed on interstate movements.

=> Creation of a Common National Market:

 GST gave a boost to India’s tax to Gross Domestic Product ratio that aids in promoting economic efficiency and sustainable long – term growth. It led to a uniform tax law among different sectors concerning indirect taxes. It facilitates in eliminating economic distortion and forms a common national market.

=> Ease of Doing Business:

With the implementation of GST, the difficulties in indirect tax compliance have been reduced. Earlier companies faced significant problems concerning registration of VAT, excise customs, dealing with tax authorities, etc. The benefits of GST have aided companies to carry out their business with ease.

=> Regulation of the Unorganized Sector under GST:

  It has created provisions to bring unregulated and unorganized sectors such as the textile and construction industries to name a few under regulation with continuous accountability.

=> Reduction of Litigation:

GST aids in reducing litigation as it establishes clarity towards the jurisdiction of taxation between the Central and State Governments. GST provides a smooth assessment of tax.

=> Tackling Corruption and Tax Leakages: 

One of the chief advantages of GST is that the taxpayers can register, file returns and pay taxes all online with the GST portal. There are systems in the process which will compare and match the invoices of the supplier and buyer. This mechanism will effectively control tax fraud and tax evasion. At the same time, it will ensure a higher flow of business to the national economy, in a structured and organized manner.

Disadvantages of GST

=> A dominating Center:

One of the cons of GST is that it would make the Center truly powerful. The Center will specify the rate of revenue that has to be shared with the States. The States might have to bear a loss due to tax sharing. The Center has the right to hike rates for states when they need.

=> IT Infrastructure: 

Since GST is an IT-driven law, it cannot be sure whether all the states in India are currently equipped with infrastructure and workforce availability to embrace this law. Only a few states have implemented this E-Governance model. Even today some states use the manual VAT returns system.

=> Higher Tax Burden of SMEs: 

Earlier the small and medium enterprises had to pay excise duty only on a turnover that exceeded Rs. 1.5 crore every financial year. However, under the GST administration, businesses whose turnover exceeds Rs 40 lacs are liable to pay GST.

=> Increase Burden of Compliance:

The GST administration states that companies are required to register in all the states they operate in. This increases the burden on the business for excessive paperwork and compliance.

=> Petroleum Products don’t fall under the GST Slab: 

Petrol and petroleum products have not been included in the scope of GST until now. States levy their taxes on this sector. Tax credit for inputs will not be available to these industries or those related industries.

=> Coaching of Tax Officers: 

There is inadequate training that is provided to the Government officers for practical usage and implementation of such systems since the GST administration heavily banks on information technology.

GST in India was a sweeping reform and benefits of GST and has changed the way businesses are conducted. Businesses are being included in the formal economy through GST implementation. GST and its benefits have provided long term returns for the Indian economy on a large scale which have been welcomed as a new change by all the stakeholders.

To conclude, every reform or new initiative won’t come without its share of hassles and disadvantages. But many of these disadvantages are temporary because the GST Council is monitoring the implementation of GST on a regular basis, and also taking regular feedback from the business sector regarding the issues that they face. So, we can be sure that over time, GST will fulfill its objective of being a growth and business-friendly tax mechanism.