There is work to be done if the landmark reform is not to become a tryst with disaster.
The GST was India’s second tryst with destiny and introduced with the great hope that it would help India achieve economic greatness. But with each passing week, the new complex tax system is getting increasingly difficult to implement. Seventy years ago, India was ill prepared for a hastily imposed independence and the birth of two nations. The consequence was the tragedy of Partition. The country was equally ill prepared for the GST which came in the wake of extensive collateral damage inflicted by demonetisation. The consequence has been a serious setback to several sectors of the economy. If the GST has to be made “good and simple” it is suggested that the following “not-to-do list” be adopted, at least in the short term.
One, e-way bills. The implementation of e-way bills should be postponed for at least a year. The existing electronic system is woefully inadequate and one shudders to think what will happen if every movement of goods requires access to a portal for generation of an e-way bill. Further, most transport operators have only a few trucks and it will be cruel to inflict this torturous system on them when the Centre and states are ill prepared.
Two, monthly returns. The proposed system of filing GSTR-1, GSTR-2 and GSTR-3 — three returns per month — proved to be unworkable and necessitated the GSTR-3B return which is a monthly summary. This monthly return should be continued for a year till the electronic infrastructure is improved. It is also worth reconsidering the need to file 36 monthly returns per year per state. These provisions are ill-advised and need to be dropped.
Three, matching of invoices. This system does not exist anywhere in the world and there is not a single logical reason why this should be implemented in India. It will place an intolerable burden on the electronic infrastructure and entail huge compliance costs for the small and medium sectors. There is a huge tax bureaucracy which is meant to take care of errant tax-payers. If all assessees match their invoices, why have the tax department or at least 80 per cent of them?
Four, exports. No sector has been dealt with a more crippling blow than the export sector. Under the earlier system, non excise exporters, merchant exporters and service exporters could simply export goods and services. In the GST regime, an exporter has to execute a letter of undertaking subject to eligibility or a bond with bank guarantee just to export. The government promised instant refunds but this has not happened. Merchant exporters who could earlier procure goods without tax are required to pay the GST which is a cash outflow. Airfreight on exports which was not subject to service tax now attracts a GST of 18 per cent. Jobworkers who were not taxed before now charge GST on the exporter. Now, had the system functioned and all these input taxes were immediately and automatically refunded, the position would have been tolerable. But serious glitches in the electronic system have adversely affected the refund system resulting in serious working capital pressure on exporters. Unless the earlier system is restored, Indian exports will be seriously affected.
Apart from the above not-to-do-list, the following steps are suggested to make the GST business-friendly and more in tune with Indian ground realities. One cannot wish away the large unorganised sector and it is not practical to bludgeon them into becoming instantly tax-compliant by digitisation. The composition scheme, applicable to traders up to Rs 75 lakh, is a non-starter because it does not permit any inter-state purchase/sale. Thus, a small hosiery shop in Mumbai cannot purchase banians or socks from Tirupur. And traders in places like Delhi and Goa will be unable to avail the scheme because most products have to be brought from other states.
It is necessary to seriously consider a flat-tax GST rate of, say, 10 per cent, on all businesses with a turnover of upto Rs 2 crore regardless of the product or service. The GST paid thereon should also be eligible for input credit. Such a reduction will be a terrific boost to the growth of goods and services, while eliminating huge paper work and electronic overload. However, it is necessary to determine the number of manufacturers, traders and service providers who will come within the Rs 2 crore slab, which can be increased or decreased suitably. It is also necessary to stop making changes in procedure and adding new requirements. Seven amendments to the CGST rules in a span of less than three months and multiple amendments to notifications have only increased the confusion. The FAQs, published at great cost, must be binding on the Centre and the states as they ensure pan-India certainty. It is strange to include a disclaimer after the FAQs resulting in an open invitation to the tax department to make demands contrary to the clarifications issued from time to time.
More serious problems lie ahead. The multiple rates of taxation and an elaborate classification system are bound to lead to classification disputes. It is imperative that classification is shrunk to three or four categories with not more than three applicable rates. A lower rate of GST will stimulate demand and spur economic growth because high taxes are always counter-productive. Indeed, a major part of the revenue of the states is from petroleum products and excise duty on alcohol. The collection of sales tax on various other goods is substantially less. Therefore, having a maximum GST of 18 per cent will result in substantially more revenue than the present complex system of higher rates of taxes.
The proposed system of shared administration will also lead to serious difficulties. It is better that the states are given exclusive jurisdiction to deal with assessees upto a turnover of Rs 10 crore or even Rs 25 crore so that the Centre can only deal with assessees with higher revenue. It will, of course, be necessary to ascertain the number of units that will be covered if the slab is raised to Rs 10 crore or Rs 25 crore.
Even the most ardent supporter of the GST cannot deny that the new system has not been as beneficial as expected. The present GST system, like socialism, sounds wonderful in theory but is completely unworkable in practice. It is dangerous to proceed with the hope that things will eventually settle down. Immediate steps are necessary to ensure that India’s second tryst with destiny does not become a tryst with disaster.