The introduction of the Goods and Services Tax is undoubtedly a path-breaking indirect tax reform in the Indian history. A tax reform of this magnitude, in a country as large as India, operating under a federal structure, was expected to have teething trouble, but the response of the government and the GST Council in understanding and addressing these concerns through interim and medium-term solutions is laudable. Just as we complete a year into the GST era, the challenge continues for both policymakers and stakeholders especially around the technology front and the ease of compliance.
GST envisaged a reduction of cascading taxes with increased input tax credits in the value chain. Hence the law provided that such efficiencies are passed on to the consumer with a commensurate price reduction. Prices too have been kept under check through the strategic implementation of anti-profiteering provisions. For maintaining parity between the effective tax rate under the erstwhile regime and multiple tax rates under GST, rationalisation of the headline rate was undertaken.
However, multiple rates and large gaps between rates have inadvertently created problems not only for the industry but for the government as well.
As we look back at our experience, there is a need for more clarity on the appropriate classification of goods and/or services. There have also been certain divergent rulings by the Authority for Advance Rulings, constituted in each state, which has fueled confusion on the classification and application of tax rate. For example, in a recent case on the query of GST on solar engineering, procurement and construction projects, divergent rulings were given by the Maharashtra and Karnataka AAR. Unlike erstwhile central indirect tax laws, GST has not envisaged a centralised advance ruling authority.
There is an urgent need to decide on having a centralised AAR as the initial experience has not been encouraging for businesses.
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Moreover, the appellate authority for AAR rulings has not been set up. We believe that in addition to having a centralised AAR, a centralised appellate authority should also be set up for which suitable amendments may be necessary in the law.
Corporates, having operations pan-India and opting for business vertical-wise registration, faced the challenge of getting registration at the onset of GST implementation.
Instead, a via media of using ‘new registration’ was suggested for getting vertical-wise registration. This resulted in certain difficulties which are yet to be fully addressed. Such corporates are hopeful that audits will be conducted by a central agency and not separately for each registration since individual registration-wise audits could lead to possibly different tax treatments on similar transactions in different states. Even with uniform provisions, the centre and state tax officers, do at times work in isolation, leading to duplication of efforts in matters like transition credit verification. Such issues would conflict with the government’s goal of improving the ‘ease of doing business’.
There have been many procedural difficulties too under GST—refunds, return filing and e-way bills—due to the underdeveloped IT infrastructure. Earlier, exports suffered due to delays in refunds of taxes paid and lack of clarity on export procedures.
Though the government has taken a number of steps to facilitate faster refunds, exporters continue to experience strained working capital on these refund delays.
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The mechanism of future compliance under GST is still evolving. For example, the mechanism of return filing and invoice matching, as mandated by the GST law, were not implemented by the government since the inception of GST. Compliance is governed through a summary return which is a pragmatic compromise for the government’s earlier format of tracking taxable transactions. A simplified mechanism of filing returns and a matching process that aligns with the way business is conducted is the need of the hour.
Industry is also hoping that the burden of invoice matching is not made applicable retrospectively with effect from July 1, 2017.
In the course of our adoption to the GST regime, we had to engage with all our clients, particularly the public sector undertakings and government departments to ensure a smooth transition of existing contracts to GST. This helped in arriving at the GST gains that are required to be passed on to them. While the GST implications were understood by them, the lack of amendments to internal payment process guidelines has resulted in a demand for independent proof (like a chartered accountant’s certificate) / undertaking for GST payment on the lines of the pre-GST regime, leading to payment delays and avoidable costs.
The abolishing of octroi/entry permits have helped smoothen the movement of goods but another procedural challenge could be the implementation of the e-way bill at the ground level. Currently, the e-way bill is expected to help reduce tax evasion. It is expected that e-way bill would bring the unorganised sector into the formal sector. Statistics reveal that currently only 70 percent of the taxpayers, enrolled under GST, file their returns.
Bringing petroleum products under the GST is important as, currently, state government taxes on petrol and diesel, are ad-valorem (i.e. a percentage of the price, and not a fixed tax). More importantly, there is cascading of taxes, something which the GST will correct. Of course, this would mean a loss of revenues for state governments, which the central government will have to initially compensate for.
In the years to come, the real challenge will be to bring alcohol, real estate, and electricity, under the ambit of GST.
Alcohol remains a huge source of revenue for state governments. Moreover, it will be absolutely essential that simplified return filing process, unrestricted input tax credit provisions and simplified process for grant of refund are implemented for enabling an increase in compliance. While these are some of the immediate challenges before the GST Council, we believe that these also will get suitably addressed, given the track record of the GST Council this far on such matters. The journey has just begun.
R Shankar Raman is Group Chief Financial Officer at Larsen & Toubro.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.