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Five structural changes to make GST simple, stable
January, 27th 2020

With the new compliance regulations, including e-invoicing, proposed from April 2020, the revenue collection is likely to improve with real-time tracking of input credits claimed by businesses.

Goods and services tax (GST), slated to be a good and simple tax, is now a toddler of 30 months. There is a consensus that it has been good in terms of reduction in effective rate of tax and supply chain efficiencies for businesses. However, industry is complaining that it has not been ‘simple’ and has increased the compliance burden.

It is, therefore, important that we look at some structural changes to bring in a bit more stability and certainty in GST.

To start with, we must put the debate on frequent TAX rate changes to rest by bringing in a white paper outlining the rate structure we want over next few years. Increase in tax rates does not guarantee increased GST collections, that too during the phase of economic slowdown. However, there is a need to simplify the structure by reducing the rate slabs to three. Either we need to collapse 12% & 18% or 5% & 12% slabs into a single rate.

Broad-basing the input tax credit (ITC) system is also urgently needed. Logically, GST incurred on all business expenses should be allowed as a setoff, in line with global best practices. If liberalising the credit is not possible then a flat denial of say 5% of total input taxes, at the option of tax payer, can be explored without the need of detailed scrutiny of nature of expense incurred. Blocking input credit for sectors such as restaurants and real estate distorts the GST chain and must be reviewed.

Large part of economy is still outside the GST net and GST Council should have a comprehensive discussion on how real estate, petroleum and electricity can be brought in its fold. This can be done in a staggered manner by first bringing in industrial fuels like Aviation Turbine Fuel (ATF) and natural gas.

Businesses are starved of cash as of now and GST is one of the reasons. The input tax credits are claimed at a state level and many businesses have credit accumulation in one state but are required to pay tax in cash in some other state(s). At least for central GST, a national pool can be considered, in addition to exploring innovative ideas of allowing an offset against income tax. Any excess input taxes should ideally be allowed as a refund, subject to safeguards that may be needed.

From government’s standpoint, monthly average GST collection has only been a tad above Rs 1 lakh crore in the current fiscal year and the budgeted target is likely to be missed by a significant margin. While revenue collection is important, it should not determine the success of GST, which is manifested in ease of doing business and increase in tax base.

With the new compliance regulations, including e-invoicing, proposed from April 2020, the revenue collection is likely to improve with real-time tracking of input credits claimed by businesses.

One would hope that the government would set a more realistic GST collection target in the upcoming Budget.

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