Goods and Service Tax (GST)

In News

• Recently the Finance Minister called for debate to undertake course correction in the indirect tax regime (GST).

About

• The recent rollback of the Goods and Services Tax (GST) rate ‘corrections’ on textiles will hurt the Production-Linked Incentives (PLI) scheme for the sector, the Union Finance Minister said.

• Current issue: GST rate structure remained inverted for textiles, with basic raw material taxed at 18% while later parts of the value chain attracted lower rates.

What is Goods and Service Tax (GST)?

• Goods and Services Tax is an indirect tax used in India on the supply of goods and services.

• It is a value-added tax levied on most goods and services sold for domestic consumption.
• It was launched in India on 1 July 2017 as a comprehensive indirect tax for the entire country.
• It is a comprehensive, multistage, destination-based tax– comprehensive because it has subsumed almost all the indirect taxes except a few state taxes. 
• It is paid by the consumers and is remitted to the government by the businesses selling the goods and services.
• It is of three types i.e. 
  • CGST to be levied by the Centre, 
  • SGST to be levied by the States and 
  • IGST a tax levied on all Inter-State supplies of goods and/or services.  
• All these taxes are levied at rates mutually agreed upon by the Centre and the States. 
• The GST Council headed by the Union Finance Minister is the governing and key decision-making body for GST. 

What is Inverted duty structure?

• Definition:
  • An inverted duty structure comes up in a situation where import duties on input goods are higher than on finished goods. 
  • In other words, the GST rate paid on purchases is more than the GST rate payable on sales.
• What is Inverted Duty Structure under GST?
  • Under GST, inverted duty structure means inputs (inward supplies) used are having a higher GST rate compared to the GST rate of finished goods (outward supplies).
  • In simple terms, it means the GST rate for raw materials has a higher tax rate whereas the GST rate on finished goods is lower.
• Problems with the current inverted duty structure under GST:
  • Taxpayers will have accumulated credits in the form of refund claims with the tax Department.
  • The inverted duty structure is a revenue loss for the government as it has to refund the tax already paid (in inputs).
  • Under GST, the inverted duty structure is identified for goods and not for services. Or in other words, there is recognition for ‘input good’ and not for ‘input services’.

Significance of GST

• Better Compliance: GST helped in achieving better tax compliance by subsuming multiple taxation and reduction in taxation burden in the last four years.
• Automated tax ecosystem: It helped the country in transitioning to an automated indirect tax ecosystem. From electronic compliances, generation of e-invoices to tracking movement of goods through e-waybill – everything is now online
• E-invoice & More Revenue: The E-invoicing system helped reduce fake invoicing. Use of technology with online bill generation has resulted in smoother consignment movement and much fewer disputes with officials. After the introduction of E-invoice, GST collections have risen steadily since November 2020, surpassing the Rs. 1 lakh crore mark on several occasions.
• Logistical efficiency, production cost cut: Another major achievement of this regime is the fact that over 50% of logistics effort and time is saved since GST has ensured the removal of multiple checkpoints and permits at state border checkpoints. 
• Lesser transaction costs: After the introduction of GST, there has been a significant reduction in transaction costs. This reduction has been a huge breakthrough in the interstate movement of products, allowing the country to boast of a single national unified market for businesses. 
• Cooperative Federalism: The customs portals are linked with the GST portal for credit availing on imports constitution of the GST Council and ensuring Centre-State partnership in the decision-making process. It ensured cooperative federalism to be its major part.
• Ease of doing business: India’s ease of doing business ranking has improved significantly in the last four years. Before GST was implemented, India’s Ease of Doing Business ranking was 130 in 2016. In 2020, India was ranked 63rd on the list.
• More Freedom: Since the GST rate is the same across the country for a particular supply, traders and manufacturers in the organized sectors have gained more freedom to choose the best vendors, suppliers, and other stakeholders with better pricing, regardless of their location. 
• Improved Competitiveness: GST has improved the competitiveness of domestic industries in the international market by removing hidden and embedded taxes. 

Challenges with GST 

• Constant amendments: Over the last few years, the GST law has seen many amendments. During this time, all these revisions often confused the taxpayer and as well the tax administrators which created misunderstandings and misconceptions. To date, more than 1,000 notifications/circulars/instructions/orders have been issued by the government machinery. 
• Non-implementation of GSTR-2: GSTR which was the only control for systemic reconciliation was never implemented. To prevent any bogus claim of ITC, reconciliations are required to be controlled by the system. However, since it was never implemented now taxpayers asked to provide self-attested offline reconciliations maintained in annual return GSTR 9 or GSTR 9C. 
• Refund delay issues: While the Government has taken many steps to smoothen the process of export refunds, automatic processing of refunds has always been an area of major concern under GST. Since there are manual approvals involved in the existing process, there are chances of a discrepancy, human error, delay in refund processing which goes against the expectations of the exporters from the system.
• Adaption & Technical Issues: Small and medium businesses are still grappling to adapt to the tech-enabled regime. The fundamental principles on which the GST law was built viz. seamless flow of input credits and ease of compliance has been impaired by IT glitches, 
• Complex Penalties: Many businesses are genuinely not able to monitor their vendor behaviour and feel that they should not be penalised for the tax compliance deficiencies of their vendors once they have paid the GST amounts to their vendors.
• Low Revenue: Widespread non-compliance and non-filing of GST returns was considerable in the first three years of GST which led to low revenue collections.
• Other Concerns: Further, the 15th Finance Commission, in its report, has also highlighted several areas of concern in the GST regime relating to:
  • multiplicity of tax rates, 
  • shortfall in GST collections vis-à-vis the forecast, 
  • high volatility in GST collections, 
  • inconsistency in filing of returns, 
  • dependence of States on the compensation from Centre

 Way Forward

• India has served as an example to the world by successfully implementing one of the most complex tax transformation projects for the country. Although it is important that the shortcomings be swiftly resolved.
• Pandemic has had severe impacts on GST also and led to economic contraction. Certain structural level changes to the law may help boost the business and economy.
• Constitute the GST Appellate Tribunal as it is obvious that all taxpayers do not have the finances or means to approach the High Court for every practical difficulty faced.
• Streamlining of anti-profiteering measures and simplification of compliance procedures also needs to be revisited to ensure that the cost efficiency and reduction in prices envisaged under GST law finally reach the common man.

• The law is still a ‘work-in-progress’ and the process of evolution, in such a complex journey, cannot be eliminated.

Source: TH