1 NATION, 1 TAX, 1 YEAR

1 NATION, 1 TAX, 1 YEAR

The goods and services tax, one of India’s most significant economic reforms, was put in place on July 1 last year. To mark its first anniversary, we look at what’s been achieved, the successes, failures, what the experts think and what lies ahead

HOW IT HIT BULL’S EYE, WITH A FEW MISSES

One year into the goods and services tax (GST) regime, early-day jitters have given way to general acceptance that this may not be the most perfect single tax system, but it’s working. There are many issues that remain to be addressed, but the fact that some of the knotty ones have been resolved gives rise to confidence that even these will be sorted out. Here’s how the past year panned out.

Inflation rate didn’t rise: GST, it was widely feared, would cause inflation to rise, as with many countries that launched a single tax regime. That hasn’t happened in India. The recent spike in consumer inflation has been due to high food and fuel prices, unrelated to GST. What helped? The much-criticised multi-slab structure. It ensured the levy was as close as possible to the existing rate, which meant the incidence of tax didn’t rise. The second factor was the anti-profiteering authority. Though the body was set up after the GST rollout, the prospect of its establishment was enough to ensure businesses did not abuse the transition.

Single national market: Long queues of trucks at state borders disappeared as checkposts were dismantled, creating a seamless national market. These barriers had restricted movement of goods across the country, leading to huge delays and increasing transaction costs for the logistics sector, eventually translating into higher costs for consumers. One tax nationally: A consumer in Kanyakumari now pays the same tax on an item as one in Jammu & Kashmir. GST has also allowed businesses to streamline distribution systems—production, supply chain, storage—to make them more efficient, having previously been forced to design them keeping state taxes in mind.

Formalisation kicks off, tax base begins to widen: One of the expected benefits was that GST would encourage formalisation of the economy. Evasion would stop making sense, thanks to transparent digital processes and incentive of input credit and invoice matching. With number of registrations crossing 10 million, it seems more businesses are signing up for GST. Rise in the Employees’ Provident Fund Organisation subscriber base provides further evidence of the same. More people filing income tax returns could also have something to do with GST.

Everyone wins: As many as 17 taxes and multiple cesses were subsumed into GST, aligning India with global regimes. Central taxes such as excise duty, services tax, countervailing duty and state taxes — including value added tax, Octroi and purchase tax — were all rolled into one. The new regime provided for free flow of tax credits and did away with cascading due to tax on tax, boosting company financials and resulting in reduced prices for consumers. It also ensured a single law for the whole country with uniform procedures and rules, which reduces compliance burden and business complexity. The government sacrificed revenues, but improved compliance should cover any gap.

WHAT HASN’T WORKED

Compliance has miles to go: The biggest dampener was the compliance process, as information technology glitches took more than the anticipated time to be resolved. The filing system that was put in place in the beginning was quickly abandoned as businesses struggled with compliance. A new return form is being crafted to help make the process much less painful for businesses and is likely to be available soon. Cumbersome registration system: Multiple registration requirements have complicated things for industry, which was expecting simplicity. In many cases, registration is required in all states. Companies fear that multiple audits and assessments due to multiple registrations could make life more difficult for them going forward.

New cesses crop up:

While GST scrapped a multiplicity of taxes and cesses, a new levy in the form of compensation cess was introduced for luxury and sin goods. This was later expanded to include automobiles. A new cess on sugar is also being examined.

Too many tax slabs:

The original criticism of a too-complicated tax structure with multiple rates remains unaddressed. There are as many as six tax rates and one ‘nil’ rate. Too many rates lead to classification issues and tax disputes, distracting from the simplicity of a single tax that GST should have been. Refunds problem for exports: The refund mechanism for exporters, including data matching law, besides procedures governing them, have irked the sector, particularly smaller entities that saw their working capital requirements rise. Though several efforts have been made to address the issue, it may require more intervention.

WIN FACTOR: CONSENSUS & AGILITY

War room saved the day: A GST Feedback and Action Room was set up to take care of initial launch issues. The government remained open to addressing issues as they cropped up, with feedback flowing in fast via phones, messages and even Twitter. Return filing dates were deferred, tax slabs were rejigged to address industry and consumer concerns and procedures and rules were amended to ensure hardships were alleviated. The officers’ committee — comprising state and central officials — still meets regularly to draw up options for the GST Council to act upon.

GST Council delivered: The GST Council, comprising central and state representatives, was the kind of federal arrangement that could have easily been bogged down by ego and politics. The Centre has a 33% vote while the states account for 66%, with any dispute needing 75% support to be resolved. It has never had to vote on any issues, with just one dissent recorded so far. There may have been bickering and differences of opinion, but matters were always thrashed out and a painstaking consensus achieved. The council has found solutions to most issues and these have not been shoddy compromises but sound decisions that have only improved the single tax. The council has provided a template for more such structures where the Centre and states could work together.

The Economic Times, 29th June 2018, New Delhi