The GST 5 Year’s Review: Some Hits, Many Misses
Since its implementation in 2017, the GST has experienced bottlenecks despite bringing about greater business ease. These include challenges with claiming input tax credits, an increase in audits, the fact that individual states are not benefited, and the inability to reach the revenue-neutral status.
The raucous promise of reducing the indirect taxation framework and combining several levies came along with a loud introduction. Unfortunately, the Goods and Services Tax (GST) is still a work in progress after five years.
The introduction of GST has three main goals: to get rid of hidden taxes, promote the convenience of conducting business, and boost income. The latter is now evident in increasing monthly revenues, which reached Rs 1.4 trillion in June 2022 and increased for the fourth straight month since March 2022.
Additionally, businesses have reaffirmed that reducing documentation has improved the convenience of conducting business. “We were freed of a lot of paperwork when the central excise levies were eliminated. Prior to that, there were many taxes, such as multiple entrance taxes, “said Tapan Roy, editor of their publication Shilponnoti and treasurer of the Federation of Association of Cottage & Small Industries (FACSI). “Nowadays, bookkeeping is simpler. There is just one officer and tax to deal with.”
One Taxation System For Everyone
The implementation of GST was not simple. The government had to persuade the states to agree to a tax structure that would cause them to lose out on sources of revenue before it could implement it at the stroke of midnight on July 1, 2017. It was essential that the Center and the states, as well as other political organizations, reached a consensus. However, this astounding feat was accomplished with skilful statecraft and politicking by the late Arun Jaitley, who was the finance minister at the time.
Several goals were established to actualize the one country, one tax concept, and some of them were accomplished over the past five years. Due to increased reliance on technology, the consolidation of compliances, and a unified platform for communication between tax authorities and taxpayers, the perception of indirect taxes has changed.
“Businesses are supportive of the government’s efforts and see the GST transition as a good development. The administration’s vision and use of technology helped to standardize compliances throughout all of India’s states. Compared to the previous indirect tax system, this is a vast improvement. Businesses have benefited from aspects including competitive pricing, an optimized supply chain, and the availability of a wider loan pool, “Deloitte India Partner Saloni Roy stated.
The timing of the GST’s adoption turned out to be its major problem. It was acknowledged that this formalization would momentarily have an effect on India’s small and medium-sized enterprises. However, the sector suffered a further setback when it was implemented shortly after demonetization, which rendered the majority of India’s informal economy unviable.
In 2020, COVID-19 dealt small enterprises yet another knockout blow. Their financial flows and supply networks were affected by the statewide shutdown and ensuing limitations, which prevented GST income from increasing as it would have.
By the way, the economy had already begun to slow down before the outbreak. GST revenue was unable to rise at the expected rate of 14% annually or be revenue-neutral.
A Sudden Decline in Revenue Momentum
GST has to be revenue-neutral by definition. Pre- and post-GST collections were to be kept the same throughout the whole fitment procedure. This, however, was not considered during the initial discussions, and it is now coming back to haunt the GST Council.
“The Reserve Bank of India study’s revenue-neutral rate has been exceeded, which is bad for the system. It has already decreased to 11.6% from its previous level of around 15.5%. That requires a correction, given the kind of refunds that are occurring as a result of the inversion that is now being fixed, “Nirmala Sitharaman, the finance minister, made the statement after the 47th GST Council meeting on June 29, 2022.
Additionally, states did not benefit from GST in any way. States were promised reimbursement for lost revenue up until June 2022, before it was introduced. This compensation sum was generated in addition to the 28% tax by levying a cess on luxury, derogatory, and sinful items.
States headed by the opposition have pushed for a 5-year extension of the compensation system or a rise in their share of the GST income from the present 50% to 70-80%. Only five out of the 31 states and UTs had a revenue increase that was higher than the anticipated revenue rate for states under the GST in the fiscal year 2021–2022, according to statistics on revenue growth gathered for the GST Council Meeting: Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim.
The states with the largest income gaps between protected revenue and post-settlement gross state GST revenue in 2021–22 were Puducherry, Punjab, Uttarakhand, and Himachal Pradesh.
Cess collection has not grown as rapidly as protected government revenues, which have grown by 14 per cent annually. Covid-19 increased the gap between anticipated income and actual revenue collected as a result of a decline in cess collection.
Major Concerns for Small Businesses
GST is a progressive tax by definition, meaning that businesses only pay tax on the value added to their products or services. Nevertheless, suppliers are having a difficult time obtaining input tax credits (ITC).
Shiv Sharma, a proprietor of a wholesale clothing store in Delhi’s Karol Bagh, has been feverishly going from one ITC claim to the next. He said that once the pandemic hit, his company’s cash problems got worse.
“Even if I pay my GST on time, I will not receive the ITC if the buyer does not pay his tax. All small firms struggle with cash. For tiny firms like ours, money becoming stranded like way is terrible news. This forced a number of people I know to close their businesses, and the epidemic made it worse, “says Sharma.
The procedure of matching and reconciling ITC claims made through GSTR-3B with corresponding data in the automatically generated GSTR-2A has proven to be challenging even five years after the implementation of GST.
Although the one nation, one tax (ONOT) system theoretically guaranteed a smooth flow of ITC, the actual reality has been different. In reality, government agencies have been notifying taxpayers of ITC inconsistencies.
Anil Bharadwaj, Secretary-General of the Federation of Indian Micro and Small and Medium Enterprises, shares Sharma’s anguish (FISME). According to him, enterprises are responsible for the expense of a supplier’s noncompliance.
“Many high courts have publicly said that while I have performed my obligation of collecting the tax, it is not the seller’s responsibility to be accountable for timely tax deposits on the buyer’s side. But the issue still exists, “Adds Bharadwaj.
The Era Of Audit Raj
The difficulty that small enterprises have with audits is another. Tax experts have voiced concerns over an increase in the number of businesses seeking guidance on issues pertaining to departmental audits.
An audit is frequently started because there is a discrepancy between the automatically generated return of raw material and service purchases and the tax return that displays a summary of transactions on the basis of which tax is paid by a corporation. Businesses claim that conducting audits and requesting information or documents that are either already on the GSTN system or that are not relevant to GST have significantly hampered their ability to conduct business.
Consider a company that operates in many states. In that situation, they are subject to official audit calls and notices to appear at any time, and the relevant party must appear before authorities as soon as possible.
“This significantly raises our costs. I have to travel to Patna the following day if I receive a call from there, “rues Kolkata-based marble dealer Haridas Aggarwal. “I am a businessman; thus, I have no idea what compliance and legality are. So that I won’t have to field countless calls, I hired attorneys and chartered accountants.
I cover the cost of their travel as well as other compliance problems. Wasn’t the system established to get rid of these things?” Even after five years of operation, the GST still has a few chinks in its armour, despite being put in place to make businesses run more smoothly. These wrinkles will continue to affect India’s MSMEs, which support nearly 11 crore employment nationwide, unless they are ironed out.
Edited by Prakriti Arora
