By Harishanker Subramaniam
It’s been 18 months since the introduction of the Goods and Services Tax, the biggest tax reform this country has seen since independence. When a country of the size of India with its multi-party federal structure, with both the centre and states having their own fiscal autonomy, looks to introduce GST, it was a given that the design will be India specific with basic principles borrowed from other Value Added Tax/GST laws.
This set the stage for a dual GST where both the centre and states taxed the same value chain/ base with an integrated (interim) GST for inter-state transactions. This structure was expected to be complicated, more so with multiple rates and exclusion of goods like petroleum products, real property, and electricity duty.
All the above were necessary evils for consensus to emerge to amend the constitution and implement GST.
At the very outset it was clear that the lawmakers and GST Council drafted a law, a rate structure and a base that was far from ideal. The objective was to implement GST first, and then tweak it periodically, basis feedback and improve the structure as we go along.
This is evident from the fact that the GST Council in the last 18 months has met 31 times and taken successful decisions through consensus. The GST Council as a constitutional body has had unparalleled success which many were sceptical about, and due credit goes to the Finance Minister of the Union of India and all State Finance/ Revenue ministers besides the untiring efforts of the GST working committee.
The changes have broadly been in the following key areas:
- Rate rationalisation – especially in the 28 percent category
- Ease of compliance – GST attempted monthly reporting at transaction level with invoice matching – a huge change from summary reporting in erstwhile central and state laws.
- Improvements in law through changes in the Acts and rules – responding to ground reality across several sectors.
Multiple rate structures arose because the lawmakers played safe and tried to maintain or be close to the legacy combined effective rate (excise + VAT) on goods. This led to a complicated rate structure of 0 percent, 5 percent, 12 percent, 18 percent, 28 percent and 28 percent plus cess on demerit goods.
Services originally envisaged at 18 percent later saw the 12 percent and 5 percent digressions to assuage sectoral constituencies, some of which were driven by key inputs being outside the GST ambit, leading to a cascading impact in these sectors. All these unfortunately added to the complicated GST structure, one difficult to comply with and administer.
Originally 224 tariff items of goods were in the 28 percent category (in order to maintain proximity to legacy rates) which was a non-starter. Having said that, the GST Council realised and responded in addressing this anomaly by reducing the items in 28 percent category right through these 18 months. As of the changes made on Dec. 22, 2018 there are now just 30 items in that tax slab.
To begin with, this 28 percent category should have only covered very limited demerit goods – something even the Prime Minister alluded to prior to the 31st GST Council meeting.
It’s expected that will be the final goal over the next few months but the challenge will be the inconsistency in GST collections.
Rate rationalisations have also happened across other rate categories but in a more limited manner, ultimately over the next one-two years the best would be move to a two-rate structure with a higher demerit rate maybe for some limited goods and with all currently excluded goods within the GST base with full input tax credits.
Rate rationalisation discussions always go hand in hand with the issue of GST collections.
With no invoice matching, as originally envisaged in early months, there was evasion, leading to depressed collections.
With the introduction of the E-way bill, the tracking of goods both intra- and inter-state has become more effective, with some improvements in collections. Reconciliation of vendor credits, the potential introduction of simplified dynamic invoice matching in the near future all augur well to improve compliance and collections in the medium term.
With the centre’s fiscal situation under strain, and that may apply to some states as well, GST revenue collections need to become consistent and buoyant.
Recent conversations around a backstop solution of GST compensation to states, beyond the initial five years, underlines further the importance of robust and consistent revenue collections.
Rate rationalisation needs to happen with an increase in the base, and the hope is that the GST Council in its wisdom will soon address the issue of expanding the GST base to include petroleum products, real estate and property and electricity duty, with full input tax credit.
Ease Of Compliance
Compliance proposed under GST underwent a major shift with monthly transaction level electronic reporting and dynamic invoice matching for complete value chain visibility.
This was a huge change from monthly, quarterly, bi-annual summary reporting under erstwhile central and state laws. The change was so substantial that every company had to spend significant time and money to change and upgrade their ERP systems to be able to comply with the GST regime.
What India was aiming for was complete digitisation of GST compliance data, laudable, but a change that required adequate planning, time for testing by the GST Network and the readiness of all stakeholders.
Government and law makers underestimated this tectonic shift and this became even more daunting with law and return format changes being notified till the very last minute. With limited time for testing the GST Network what stakeholders, especially taxpayers, faced in the initial three months of GST implementation was pain and chaos. This prompted course correction and the introduction of GSTR3B summary monthly reporting and filing of only the GSTR1 form instead of the ealier envisaged GSTR1, GSTR2, GSTR2A and GSTR3 alongwith invoice matching every month.
The GST Council reacted well in making these above interim truncated return forms which continues till date.
The new simplified return with invoice matching will be tested on a voluntary basis starting April, it is expected. It will not be mandatory till after elections.
This indeed is a wise move as everybody now understands the magnitude of such changes and time required to test software adequately both at GST Network’s and tax payers’ end. Having said that invoice matching is critical and will provide the necessary fillip for creating an audit trail as well as for robust and consistent revenue collections.
Another wise decision taken on Dec. 22, 2018 was the further extension of annual returns to June 2019. These returns, to say the least, are onerous and the hope is they will be examined more closely for further simplification in the coming months. It is critical that industry voices its concerns now to ensure a smooth annual returns filing process and GST audit in the first year.
Designing and drafting a GST law in the backdrop of India’s federal structure with the pr-existing mind-set of legacy VAT and central laws was always a challenging task.
Summarising the big law changes will require another article by itself but the highlights that come to mind are:
- Deferral of reverse charge mechanism on supplies received from unregistered dealers till September 30, 2019.
- Exemption from discharging of GST on advances received for future supply of goods.
- Exemption from registration for persons engaged in making inter-state supply of services; provided the aggregate turnover does not exceed Rs 20 lakh.
- Exemption for services by an establishment in India to its another establishment located outside India.
While it’s easy for many to critique the process and the many pulls and pressures that resulted in a GST implementation than was not ideal, it has always been my view that the law and its structure will change substantially in the first 2-3 years, responding to stakeholder feedback.
That’s exactly what we have seen in the last 18 months with 30 GST Council meetings issuing more than 400 notifications, circulars and orders to address nagging issues and more expected after this latest round on Dec. 22, 2018 meeting. This will be a continuous journey and is required for a better law in the context of industry, its transactions and the changing business models in this digital world.
Harishanker Subramaniam leads the indirect tax practice at EY India.