The idea of moving towards a Goods and Services Tax was first mooted by the then Union Finance Minister in his 2006-07 Budget speech proposing its introduction from April 2010. An Empowered Committee of State Finance Ministers that formulated the design of the State Value Added Tax (transforming sales tax) was requested to come up with a road-map and structure for GST.
Joint Working Groups of officials representing the states and the central government were set up to examine the nuances specifically on exemptions and thresholds, taxation of services and taxation of inter-state supplies. Subsequently, the Empowered Committee released its First Discussion Paper in November 2009, laying out salient features of the proposed GST, which formed the basis for discussion between the centre and states.
The proposed Constitutional Amendment in 2013 to facilitate the rollout for GST was a herculean task, which eventually saw its passage in 2016. The long-drawn debate depicted values of a true democracy and principles of cooperative federalism playing out.
After the constitutional clearance, it was time for an age-old ‘rate race’ where the GST Council found itself up against 29 states and the centre with the mammoth task of classification of goods and services. India created one of the most effective institutional mechanisms with the establishment of the GST Council.
At a time when international events have been marked by a retreat into economic nativism, Indian states and the centre offered a refreshing counter-narrative, voluntarily choosing to relinquish and then pool sovereignty for a larger collective cause.
The calibration of GST rates, a politically sensitive exercise, has been kept close to the erstwhile effective indirect tax rates.
The Economic Impact of GST
Nearing its anniversary, it’s time to analyse the economic impact of the implementation of GST. An important impact which needs to be analysed is the cascading effect of taxes in the new regime. Owing to the availability of credit (which reverses the cascading effects in the erstwhile tax regime), despite the tax rates being same, the net incidences of tax on goods and services seems to have come down.
With an increased positive response to the regime, the GST Council moved almost 200 items from the 28 percent slab, leaving just 50 items in the highest slab. Similarly, several items have been moved to a 12 percent rate from 18 percent, 12 percent to 5 percent, and 5 percent to nil. It is expected that this will encourage more transparency by way of new registrants.
GST Collection Trends
One year of GST is an appropriate time to reflect as the fears of GST leading to inflationary trends seem to be unfounded, though it might be little early to assert that conclusively.
Regular notifications of businesses reducing prices validate the promise of GST.
The institution of the National Anti-Profiteering Authority has lent speed to the process of rate rationalisation, taking away the fear of penalties. The year gone by has created a reasonable expectation that the chance of prices of goods and services dropping is a fair expectation, subject to collection targets stabilising.
I anticipate that the GST collection trends will stabilise as the GST Network glitches are being addressed periodically, with the system gearing up to match invoices and take the data load. The enforcement of the GST design is, therefore, not just a shift in business and legal paradigm but enhancement of economic policy goals.
The E-Way Bill
Another important measure is the introduction of the e-way bill, which mandates all interstate movement of goods to be registered on the e-way bill portal. Though the implementation was in a staggered manner, the stability of the e-way system will ensure that lawmakers are able to track the movement of goods on a real-time basis, providing a strong foundation to address the tax leakages that persisted under the old law. This will help in greater transparency, throw up data on the concentration of manufacture and distribution of goods, reduce the cost of movement of goods, besides facilitating hassle-free movement across state borders.
The Ease of Doing Business Report
The Economic Survey 2017-18 reports that there were 9.8 million new GST registrants. Though it would be premature to conclude what impact, if any this would have in expanding the tax base, there are adequate signals that the benefits will speak out in the medium to long term by way of buoyancy in direct tax collections. The May 2018 press release says GST revenue collection in April for March 2018 exceeds Rs 1 Lakh crore and I see this stabilising in the near-term. Though, it is usual practice that in the last month of the financial year businesses catch up with arrears of previous months.
Streamlining the process of starting new businesses resulted in a jump in India’s ranking by thirty places to break into the top 100 in the World Bank’s Ease of Doing Business Report 2018, which reflects reform measures on a wide range of indicators such as tax and insolvency reforms. The 2018 report did not cover the impact of the GST, which is expected to further improve India’s ranking next year.
The Misses: GSTN and Technology
We still have some ground to cover and address rough edges. GST is a technology-intensive platform and its success is contingent upon the degree of compliance levels.
Glitches on GSTN and delays in the refund of input tax credit for the exporters have led to choking of working capital.
The GST Council and revenue officials were prompt in addressing these issues proactively after the fire-fighting of the first two quarters, by way of regular tweets, clarifications, lists of frequently asked questions and liberally extending filing deadlines, including a staggered implementation of e-way bill system.
It is expected that the GST Council shall conduct a comprehensive review of embedded taxes arising from products left outside the GST (petroleum and electricity) and those that arise from the GST itself (for example, input tax credits that get blocked because of ‘tax inversion’, whereby taxes further back in the chain are greater than those up the chain).
Such a review should lead to an expeditious elimination of embedded export taxes and pave the way for the inclusion of petroleum products.
The centralisation of the advance ruling function and streamlining dispute resolution are other areas which will occupy the mind space of lawmakers in the coming months.
Although the authority has been proactive in issuing rulings, senior officials have been prompt too, in overriding the rulings that have not lent correct interpretation to the law. For instance, rulings on the levy of GST on goods sold at duty-free airport shops and the denial of benefits of zero-rating at SEZ units are prime examples.
In conclusion, as the new regime settles down, the real benefits of a full-fledged GST by subsuming petroleum taxes, the electricity tax and stamp duty don’t seem a distant reality, given the debate between the centre and states. Neither should one rule out the possibility of rate and slab rationalisation in the medium term.
(This article was originally published in BloombergQuint, and has been republished here with permission. Mukesh Butani is Managing Partner at BMR Legal. Views are personal. The views expressed here are those of the author’s and do not necessarily represent the views of The Quint or its editorial team.)
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