In the six months since its implementation, India’s Goods and Services Tax regime has undergone several revisions, mostly to do with tax rates, composition scheme thresholds and filing deadlines. Despite that, several small businesses have complained about the tax complexity and the number of filers has not shown any marked improvement.
In response to that the government set up a six-member advisory group to suggest changes to GST. On Wednesday the group submitted its recommendations - over 100 of them.
Key among them are the suggestion to abolish the reverse charge mechanism (currently deferred) and defer the implementation of E-Way Bill to 2019.
Several recommendations have been made to reduce the difficulty involved in filing - including form simplification, fewer data fields, continuation of Form GSTR-3B, doing away with the HSN code in invoices etc.
In this discussion Pratik Jain, national leader – indirect tax at PwC India and MS Mani, senior director - indirect taxes at Deloitte India analyse these recommendations.
Watch the full discussion here:
Here are the edited excerpts from the conversation:
There is a recommendation that the reverse charge mechanism should be abolished, while it stands deferred to March next year as of now. Should it be removed altogether?
Pratik Jain: Yes, it should go. When you buy from unregistered dealers and small players in the presence of a reverse charge, you have to account for that tax as a purchaser. As a purchaser or a company, I am reluctant to buy from those small businesses, due to which they are going out of business which was not the intention. If you continue with this provision, then the reluctance to buy from smaller vendors will continue. Therefore, even we have recommended the government to do away with it. The fact that it has been deferred to March means that the government is contemplating as to what to do. It should be done away with, as it is an additional compliance burden with no additional benefits.
But this was supposed to be part of the GST fundamentals in terms of base widening. Are you not hurting the very core of what GST was attempting to do in this economy?
MS Mani: While there is pressure on people to not go ahead with the reverse charge, I would say that it is altering the fundamental architecture. Because GST was to bring a lot of people into the value chain, who were not part of the value chain earlier. This was the matching concept of one way to getting them on board. What we are discussing has only to do with the impact of the reverse charge on transactions with unregistered dealers. While there has been a lot of discussion on doing away with the reverse charge which I don’t think is going to happen, because even earlier under the service tax, we were having reverse charge which has been migrated to GST and all of it continues.
Would we do away with it only for unregistered dealers, then who will it stay on for?
MS Mani: It stays on for a very large number of other players where there are two categories. One category is where there are many service providers, while the service recipients are few. For instance, insurance companies or mutual funds. Second category is for those people where the government feels that there is administratively a huge burden. Those categories have been there in the service tax for a long time and have got migrated to GST.
So you mean that those will persist and small unregistered players will go off the net?
MS Mani: I don’t think they will go off the net. My sense is that the reverse charge needs to be calibrated. We can perhaps give it six more months or a year, but at some stage, the charge has to come because we are altering the architecture. The objective is to get more people come in the tax net, so that the taxes come down.
Pratik Jain: But are we altering the architecture? This was not the initial design of GST, because initially they said that the purchase tax will be done away with. Purchase tax is the tax you pay when you buy from somebody unregistered. So, this is the back door entry for purchase tax. I agree that other reverse charge like transportation will continue. But purchase from unregistered dealers is not logical. Then you will have a situation where larger businesses will not buy from smaller businesses which was not the intention of the law. So I have a disagreement on this front.
Another recommendation in the GST has to do with the E-Way bill and we know that the transportation/logistics industry is just not equipped in terms of generating E-Way bills. Should we do away with it too?
MS Mani: E-Waybill was not the fundamental aspect of GST, but it is instead going against the grain of GST, because GST was supposed to make the movements of goods seamless. When people move from one state to another in India, they don’t need a Visa. Likewise, services move from one state to another without requiring any form. So, why are there artificial restrictions in terms of goods? To a large extent whatever the E-Waybill does, the same purposes are fulfilled by the tax invoice. And the tax invoice is available on an electronic database for any tax authority to see anywhere in the country when the goods move. So, why are we adding one more piece to the documentation trail and calling it an E-Waybill and making it a controlled mechanism? The cause for worry does not generate from the E-Waybill, the worry is that the moment we have an E-Waybill, we have checkposts which have given the whole country a bad name. We have a very famous checkpost in Kerala which is between Coimbatore and Palghat, and at any given point in the day day you will find approximately 2,000 vehicles waiting and it will take you an hour to cross than one km stretch. The intention is to do away with checkposts and the E-Waybill is the mechanism to do it.
Pratik Jain: I agree on this part that the E-Waybill is not a good idea.
But wasn’t there a purpose to suggest that the E-Waybill is needed to keep track of movement of goods between states?
Pratik Jain: But why do we need to keep track? If goods are moving from Maharashtra to Karnataka, by way of the integrated GST mechanism you have collected the tax. Earlier, Karnataka had to track it because they had to collect tax later. Now, there is no difference in the rate of tax in two states. Government logic is that people will move away with fake invoices. So, there are two points to it. One is, they have a large machinery of state governments which practically don’t have anything to do right now. So, use it. Second is, if you have tax invoices and if you have to have this kind of system then why don’t you ask the businesses itself to put the tax invoices onto the portal before the movement happens? So, use tax invoice. Suppose, in a vehicle you have to see the veracity of the tax invoice, then you check on the system because tax invoice has been uploaded which you can do rather than having the E-Waybill system.
MS Mani: This is redundant. This is something which speaks of someone who needs to have control over the movement of trucks. We should not have control on the trucks’ movement.
Another recommendation says that inter-state transactions should be allowed in the composition schemes and that services should be allowed to avail of the composition scheme option. Would you agree that these changes are necessary?
Pratik Jain: Agreed. Inter-state transactions should be allowed because a lot of small players have a bit of inter-state sales. If I am a small manufacturer in Noida, then I might be supplying to Gurgaon and Delhi. So, it should be allowed. Services, ideally, should be extended. The only problem with services is that there was not much value addition. The government will lose a lot of money if there is one percent composition for services. For goods, you are taxing one percent on the entire amount due to which you are losing out on the margin. For services, if they have brought in, then it will not be one percent composition, but it might be at a little higher rate like five-seven percent. But there is a logic to give this relief from filing to the smaller service providers too. The idea is that smaller businesses should not have to do this complex filing.
But they introduced Rs 5 lakh crore worth of threshold for services. Was that not including the service providers itself?
MS Mani: It was. As far as the composition scheme is concerned, there are two fundamental aspects to it. Yes, services should be included. There is a fear of revenue loss, but that can be managed. One way to do it is to keep a different rate for services. It need not be just one percent, it can be anywhere between two-five percent. But the intention of a composition scheme is to simplify the ease of doing business for small businesses. Secondly, for the concept of inter-state, there should be no reason for it to not be allowed. India is one country and the movement of goods, services and people should be seamless. Where is the question of having a scheme which says that you can have seamless movement but operate within the periphery of the state? In that, there is an inherent bias for people who operate in larger states.
A person who operates in Maharashtra has a huge geographic area as a composition scheme service provider, whereas a person who operates in Kerala has a smaller geographical area. Since the composition limits are the same for both states, there is an inherent bias that gets built in towards the people who operate in larger states. In account of that you will see that the number of dealers who have filed for larger composition are more in states which have larger geographical area and the number of others are few.For a long time, we had a value added tax and a central state tax which was to regulate inter-state movements, while the VAT was to regulate intra-state movements. With GST, we should demolish that bias completely.
Several recommendations are towards simplification of filing. What are the immediate steps to be taken?
Pratik Jain: A lot of things have already been done. If GSTR - 3B is extended for a year, which is a return on a monthly basis, the recommendation is to continue with the invoice matching and defer it for a year. The only challenge is, as a business, I will keep claiming credits every month, and after a year when I do the reconciliation and I see that a large number of vendors have not complied then I will have to return it back alongwith interest. From a business perspective they perhaps need to do it on a monthly basis and do the reconciliation as per law on an annual basis. Simplification is good. We still see a lot of data required in the forms which are redundant such as the HSN. If 3B continues for a year, the other systems get stabilized and that would be a good idea. As of other recommendations like don’t do a surge rate in tax administration without the commissioner’s approval, etc, I think the administration of GST has not been given enough attention to and if it is not given attention in the next six-eight months, it could create a bigger problem in the businesses. So, I like the idea of tax administration, tightening and having guideline to go to premises and offices, rather than making a random enquiry.
There is a recommendation which says that returns should be filed quarterly but tax may be paid monthly. We’ve been hopeful of seeing more taxpayers enter the GST system and of revenue expansion and stability - if we do all these alterations, then is it going to hurt those objectives?
MS Mani: It could. The reason we have a plethora of committees who go into these aspects is because we have tried to do too many things simultaneously. We have taken a huge amount of food on the plate which is beyond anyone’s capacity to digest. If the same thing would have been served in portions, then it would have made a lot of sense. Even in the first two months of GST, is should have been suggested that let’s have 3B for a month, let 3B settle down and then we can move to 1,2,3 which is the matching and fundamental to the GST network. Similarly, the inclusion of HSN. It should not have been done from day one but should have been given six months or a year to seep into the system. Because GST is in the nature of a fundamental economic reform. It’s going to take time to settle down. It will not happen from day one.
We are changing the taxpayer habits and business habits which have developed over the last 60 years which could take a bit of time. If we have a calibrated approach which says to have 3B for the next one year and then start putting in the next steps, 1,2,3. After six months of doing 1,2,3 once the data starts matching, we should then go for matching at the HSN level. If we have such calibrated approach, then it will give the government and software people more time to prepare and will provide a complete road-map to businesses. So, businesses know that the GST reform in India is a two-year process and these are the milestones to take over. That is expected now, and the recommendations are also there.
How are taxpayers supposed to cope up with continuous changes to GST?
MS Mani: We are doing it in a reactive mode because we don’t have a planned calibrated approach and the only choice is to be reactive. For taxpayers, they have to prepare for what is already known, what is expected and be ready. Until and unless, the government comes up with a road-map of GST for the two years till 2019, it is going to be very difficult for people to navigate. But they have to navigate as they don’t have a choice.
But we have no clue regarding revenue collections stability even after seven months into the process.
Pratik Jain: The choice is between doing something and doing frequent changes rather than not doing anything at all, despite knowing that things are not working on ground. I would rather make changes even if it is frequent and more painful because it is good. GST is a big structural reform and it will take time to settle down. We have not implemented the perfect system, we did not have enough time for that, but I am encouraged by the fact that the changes are directionally good.