Five Years Of GST: Some Hits, Many Misses

Along with the high-decibel launch came the uproarious promise—of streamlining the indirect taxation regime and subsuming multiple taxes. Alas, five years later, the Goods and Services Tax (GST) is still a work in progress. 

GST was introduced with a multi-pronged objective—eliminate hidden taxes, herald ease of doing business and achieve better revenue buoyancy. The last is now reflected in growing monthly collections; it touched Rs 1.4 trillion in June 2022, rising for the fourth consecutive month since March 2022. 

Moreover, companies have reiterated that dialling down the documentation has helped ensure better ease of doing business. "The abolition of the central excise duties relieved us of a great deal of paperwork. There were several taxes earlier, including multiple entry taxes," said Tapan Roy, Treasurer of the Federation of Association of Cottage & Small Industries (FACSI) and Editor of their journal, Shilponnoti. "Now, accounting has become easier. There is only one tax and one officer to deal with." 

One Regime To Tax Them All

GST's introduction was not an easy one. Before it could roll it out at the stroke of midnight on July 1 2017, the government had to convince states to agree on a tax regime that would result in them losing out on modes of revenue generation. This agreement between the Centre and states, as well as various political parties, was imperative. However, the then finance minister, late Arun Jaitley, succeeded in this unthinkable feat through skilled statecraft and politicking. 

Over the past five years, several milestones were set, and some achieved, to attain the one nation, one tax ideology. Consolidation of compliances, significant reliance on technology and a common portal for communication between authorities and taxpayers have changed the perception of indirect taxes.

"Businesses view the transition to GST as positive and appreciate the government's efforts. The administration's use of technology and its vision led to the standardisation of compliances across the states of India. This is much improved from the erstwhile indirect tax regime. Competitive pricing, optimised supply chain, and availability of a larger credit pool are few factors that have benefitted businesses," Saloni Roy, Partner at Deloitte India, said. 

The biggest bane for GST proved to be the timing of its implementation. That this formalisation would temporarily impact India's small and medium-sized businesses was understood. However, its introduction immediately after demonetisation, which crippled most of India's informal economy, dealt another hard blow to the sector. 

COVID-19 hit small businesses with yet another sucker punch in 2020. The nationwide lockdown and subsequent restrictions impacted their supply chains and cash flows, a lost opportunity for GST revenue to pick pace otherwise. 

Incidentally, the economy had slowed down even before the pandemic struck. GST revenue was unable to reach the promised 14 per cent annual growth level, nor was it able to be revenue-neutral. 

An Unexpected Slowdown In Revenue Momentum

By its very definition, GST had to be revenue-neutral. The earliest fitment process had to mindfully ensure that pre-and post-GST collections remained the same. However, this did not feature in the initial deliberations, which has now returned to haunt the GST Council.

"The revenue-neutral rate of the Reserve Bank of India study has been breached to the disadvantage of the system. Where it was about 15.5 per cent, it has already come down to 11.6 per cent. That calls for a correction...the kind of refunds which are going because of the inversion that is now being corrected," Finance Minister Nirmala Sitharaman said post the 47th GST Council meeting on June 29, 2022. 

What's more, GST did not prove to be beneficial to states. Before its introduction, states were promised compensation for revenue loss till June 2022. This compensation amount was raised by levying a cess on luxury, demerit and sin goods over and above the 28 per cent tax.

Opposition-ruled states have been pushing for an extension of the compensation regime by another 5 years or increasing their share in the GST revenue from the current 50 per cent to 70-80 per cent. As per data on revenue growth collated for the GST Council Meeting, only five out of 31 states/UTs—Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim—registered a revenue growth higher than the projected revenue rate for states under GST in the financial year 2021-22. Puducherry, Punjab, Uttarakhand and Himachal Pradesh have recorded the highest revenue gap between the protected revenue and post-settlement gross state GST revenue in 2021-22.

Though states' protected revenue has been growing at 14 per cent compounded growth, the cess collection did not increase in the same proportion. Covid-19 further increased the gap between projected revenue and the actual revenue receipt, including a reduction in cess collection.

Big Worries Of Small Businesses

By its very nature, GST is a progressive tax where a company pays tax only for value-added on goods or services. However, suppliers are facing significant challenges when claiming input tax credit (ITC). 

Shiv Sharma, a wholesale garments shopkeeper in Delhi's Karol Bagh, has been running frantically from pillar to post to claim ITC. He stated that his business faced liquidity issues, which became more acute after the pandemic struck. 

"I might be paying my GST on time, but if the buyer does not pay his tax, I lose out on the ITC. All small businesses have liquidity issues. Money getting stuck like this is bad news for small-sized businesses like ours. I know of several people who had to shut shop because of this, and the situation got worse because of the pandemic," Sharma says. 

Challenges faced in the process of matching and reconciliation ITC claimed under GSTR-3B with matching data in the auto-generated GSTR-2A remain a persistent problem even after five years of GST's rollout. While theoretically, the one nation, one tax regime promised a seamless flow of ITC, the on-ground experience has been different. In fact, government departments have been sending out notices to taxpayers for mismatches in ITC.

Sharma's distress is echoed by Anil Bharadwaj, Secretary-General, Federation of Indian Micro and Small & Medium Enterprises (FISME). He says that businesses have to bear the cost of non-compliance on the part of a supplier. 

"Several high courts have openly said that it is not the seller's duty to be responsible for depositing tax on the buyer's side on time because I have done my duty of collecting the tax. But the problem persists," Bharadwaj adds. 

The Era Of Audit Raj

Another issue small businesses face is related to audits. Tax professionals have complained about an increase in the number of companies seeking advice on matters relating to departmental audits. 

In several cases, an audit is initiated due to a mismatch between the automatically generated return of purchases of raw materials and services and the tax return showing a summary of transactions based on which tax is paid by a firm. Businesses complain that doing audits and asking for documents or information, either already available on the GSTN system or seeking documents unrelated to GST, has become a significant hindrance to ease of doing business. 

Suppose a business has operations in various states. In that case, they can receive an official audit call and notice to be present at any time, and the concerned person has to present themselves at the earliest before authorities. 

"This increases our costs manifold. If I get a call from Patna, I have to reach there the next day," rues Haridas Aggarwal, who runs a marble business in Kolkata. "I am a businessman and do not understand law and compliance. So, I have appointed lawyers and chartered accountants to save me from incessant calls. I pay for their journey and a host of compliance issues. Wasn't the system put in place to do away with these things?" 

While implemented to help businesses function more smoothly, the reality is that there are several chinks in GST's armour, even after five years of implementation. Until these creases are not smoothened out, they will keep hurting India's MSMEs, which create about 11 crore jobs in India.

(With inputs from Snigdhendu Bhattacharya)