5 years on, work still in progress: The promises, challenges of GST regime

While tax evasion, technical glitches, and litigation continue to plague the indirect tax system, the revenue collections have picked up in recent months

Five years after the Goods and Services Tax (GST) came into force, the much-debated indirect tax regime seems to be finally stabilising. At least, the revenue numbers seem to suggest that.

However, contentious issues continue to plague the GST. It is still a truncated tax model, with items outside it yielding almost 40 per cent of the Centre’s indirect tax kitty sans customs duty in 2021-22 and over 40 per cent to the own tax revenues of the states during 2017-18 to 2020-21.

Besides, the states’ demand for extending compensation beyond this month is yet to be addressed, the practice of not giving receipts is still rampant in some segments of the economy, technical glitches are not completely sorted out and litigations are going on against the National Anti-profiteering Authority (NAA), which, incidentally, may be merged with the Competition Commission of India (CCI) later this year.

While GST revenues have been rising in recent months, one may argue that most of it is due to the rise in inflation. The consumer price index-based inflation rate remained over the Monetary Policy Committee’s (MPC) mandated upper tolerance level of six per cent for the fifth month in a row and stood at 7.04 per cent in May.  This was down from the eight-year high of 7.79 per cent in April after the MPC raised the repo rate and the government took fiscal measures to augment supply.

The wholesale price index (WPI) inflation rate, meanwhile, touched a new all-time high of 15.88 per cent in May despite a high base of 13.11 per cent a year ago. As of May, it has been in double digits for the 14th month in a row.

Moreover, the GST-GDP ratio has remained quite volatile over the last five years. It is estimated to have come down to 5.58 per cent during 2022-23, the lowest in almost six years. However, this figure is based on the conservative Union Budget estimates and on the assumption that state GST will be equal to central GST.

The first two months of the current financial year have yielded average GST collections to the tune of Rs 1.54 trillion a month.

Revenue secretary Tarun Bajaj hopes that GST receipts would average Rs 1.4-1.5 trillion a month during FY23. In that case, GST would constitute 6.5 per cent of the GDP (Rs 258 trillion as assumed in the Budget) at the lower end of the expectations and almost 7 per cent at the upper end.  

Amit Maheshwari, tax partner at AKM Global, said the government should strive to make the GST compliance and administration more taxpayer friendly which will further help businesses, and in turn, tax revenues and the overall economy.

Compensation to the states

The GST (Compensation to States) Act guarantees them full compensation for the first five years of the GST if their revenues under the new indirect tax fall below 14 per cent annual growth on the base year of 2015-16.  

Chhattisgarh commercial tax (GST) minister T S Singh Deo justified the demand for extending the compensation cess, saying that the GST Council came into existence only on the understanding that the states’ 14 per cent revenue growth would be protected. “On that understanding, states had agreed to surrender their right of taxation,” he said.  

According to a study by India Ratings, state GST collections grew at an average of 6.7 per cent during FY’18-21, which was lower than the 9.8 per cent growth recorded by the taxes subsumed under GST during FY14-17.

However, India Ratings principal economist, Sunil Kumar Sinha, said that the recent numbers are showing that growth in GST revenues in several states is much higher than 14 per cent. “Hence, only a few states which do not see a growth rate of 14 per cent may need compensation,” Sinha said.

The states, though, are demanding that the compensation should be extended beyond June this year.

“This is more to do with uncertainty over GST receipts,” Sinha said, adding that the states are worried that their GST revenues may not go over 14 per cent in 2023-24.  

Though the Centre had delayed GST compensation to the states from 2019-20 when the economy started slowing down, last month it released Rs 86,912 crore -- the entire amount of GST compensation payable to the states up to May 31.

Bogus or no receipts

During a debate on the GST Bill in the Lok Sabha in August 2016, Prime Minister Narendra Modi had said that the indirect tax system will end the practice of “kacha bill, pakka bill” (bogus and genuine receipts). But despite coming out with e-way bills and e-invoicing, genuine receipts are not being given in every segment of the economy.

For instance, retailers of fast moving consumer goods (FMCG), and chemists buy their stocks from super stockists who, in turn, buy from distributors appointed by the companies concerned. Though these distributors are tracked by e-invoicing and e-way bills, in many cases, the super stockists sell the products to stockists who do not keep records and do not give receipts. Because there is tax evasion, many retailers are able to sell products below the maximum retail price (MRP).
 

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In the consumer durables space, though, companies make direct sales to large stores such as Croma, Vijay Sales, Reliance Digital. Unlike FMCG and pharma, their responsibility does not end with making a sale. There are installations, after-sales service, warranties, and the like. This makes distributors a key component in the chain. Hence, pinning it down to the retail level is far easier in consumer durables.

However, though the chances of tax evasion are less in the case of large stores, things may be different at the dealer level. Suppose you visit a dealer and tell him you want to buy a TV set and it is being sold at X price at Amazon online, the dealer may give it to you at a lower rate. The only way he can do that is by evading taxes. It is difficult to pin down these dealers because they frequently change their names and do not keep records, an industry player said.

However, experts say that e-invoicing has certainly helped in reducing tax evasion.

M S Mani, partner at Deloitte said, “The introduction of e-invoicing together with credit matching in GST has been very effective in curbing GST evasion and expanding the taxpayer base.”

Conflicting orders by AAR

The state-level Authorities for Advance Rulings (AARs) have given conflicting rulings in various cases on the nature of goods, which determine the tax slab they fall under. These relate to food items such as ‘papad’, Fryums  and other areas such as setting up a solar power plant, intermediary services, and so on.

There is a provision in the GST laws to set up a centralised AAR to clarify matters if state-level AARs give conflicting orders. However, the body is yet to see the light of the day. “A centralised AAR is in the works, but may take some time,” a key finance ministry official said.

Harpreet Singh, partner, indirect tax, at KPMG India, said that there have been multiple issues on which AARs in the states have differed. This makes it difficult for a multinational company operating across states to decide which ruling and consequent tax position should be adopted across India, he said.

“In case of conflicting rulings, and in the absence of a centralised AAR, approaching the high courts becomes the only viable option,” added Singh.

However, high courts don’t entertain all petitions. Besides, they take years to decide on an issue, an industry source said.

Technical glitches

Frequent technical glitches have led to, first, the suspension of forms GSTR 2 (a purchase return) and GSTR 3 (an input-output return), and then, their scrapping altogether. Technical glitches were so rampant that the launch of the e-way bills had to be suspended in February 2018 because the system could not bear the load.

Unfortunately, the glitches crop up even now. Last month, there were snags in the GSTNetwork (GSTN), the technical support for which is provided by IT major Infosys. In fact, the Central Board of Indirect Taxes and Customs (CBIC) had to extend the filing of returns in April by a few days because of this.

Rajat Mohan, senior partner at AMRG & Associates, said that while GST gave an excellent start to the ease of doing business by unifying indirect taxes in India, technical errors in the last five years have adversely affected all the stakeholders.

“Technical glitches pushed the lawmakers to scrap inward tax matching forms, allowing unscrupulous elements to enter the tax regime to evade taxes and costing the exchequer. Such rampant tax frauds paved the way for introducing stricter tax laws like e-way bills, e-invoice, QR code, compulsory payment of tax in cash, restriction on ITC claims, blocking of GSTR -1 and 3B in specified circumstances and suspension of registration,” he said.

Besides, the technical snags have resulted in a surfeit of litigation, Mohan added. High courts have been overloaded with multiple writ petitions, and cases over transitional credit, excess payment of tax due to technical error, and non-payment of the refund due to scroll delay are quite frequent, he said.

National Anti-profiteering Authority (NAA)

While plans are afoot to merge the NAA with the CCI after the former’s term ends in November this year, the constitutional validity of setting up the body has been challenged in various high courts.

The NAA has already been given two extensions after its original tenure came to an end in November 2019. As of May, there are close to 400 cases pending with it. The NAA was set up in December, 2017 to ensure that GST rate reductions were passed on by firms to consumers and there was no profiteering. But right from the outset, the process of imposing penalties on companies was criticised for the alleged lack of a proper methodology to ascertain profiteering.

Several companies such as Subway Systems, Hindustan Unilever, Abbott, Johnson & Johnson, Philips, Acme Developers, Samsonite, Jubilant Foods, Nestle, Whirlpool, Samsung, Subway, Reckitt Benckiser and Patanjali have filed petitions against the anti-profiteering provisions under the GST in the Delhi High Court. Many more petitions are pending in other high courts.

Abhishek Jain, partner, indirect tax, at KPMG in India, said, “The NAA is expected to be subsumed with the competition watchdog CCI by the end of its tenure in November, 2022. But this change in the governing body will not affect the challenge posed towards the constitutional validity of the anti-profiteering provisions.”

The GST Council is scheduled to meet in Chandigarh on June 28 and 29 when the indirect tax regime completes three years. In the course of five years, GST Council made a number of course corrections such as on tweaking rates, raising threshold for quarterly returns, composition scheme, real estate sector, restaurants, inverted duty structure and refunds for exporters. One hopes that the Council at its forthcoming meeting will not only deliberate on issues such as extending the tenure of the group of ministers looking into tweaking GST rates and pruning slabs, but also take stock of the performance of the indirect tax system in the last five years and chart its way forward which may include setting up of a dispute resolution mechanism.