challenges that still exist after 5 years of GST.
The Goods and Services Tax (GST), which completely redesigned the nation’s indirect tax system and significantly altered tax administration and compliance, was implemented in India on July 1, 2017, marking the country’s biggest change in the indirect tax system in half a decade.
The previous five years have been nothing short of a roller coaster for both the government and the sector. Revenues reached INR 1.41 lakh crore in May 2022 as a result of activities such as the introduction of e-invoicing and the linkage of inbound and outward supply returns with the main GST reports. The tax base has also grown dramatically, with 1.36 crore active GST registrations in India as of March 31, 2022.
The following observations are important to note and are based on a GST survey and a follow-up analysis by Deloitte India.
What has worked well?
- Digitalization in compliance: The government’s automation of tax compliances has been a huge success and has operated effectively, especially when compared to the previous system. This has been made possible by the creation of the GSTN portal, a “one-stop-shop” for all GST compliance.
- A steep learning curve has been caused by the pandemic and the implementation of the e-invoicing regime under GST. Businesses, particularly MSMEs, have been able to take advantage of this digital wave to accelerate growth and strengthen their internal compliance processes.
- Technology application: The initial phase focused on building the essential features required by taxpayers and officials. With it in place, GSTN focused on leveraging the technology and data at its disposal to improve compliance, expose fraud, and help policymaking.
- To achieve this, GSTN established the Business Intelligence and Fraud Analytics (BIFA) unit in March 2019. This unit used machine learning and artificial intelligence to create the BIFA tool, which has become one of the major achievements in the last five years of GST. Additionally, GSTN provides tax officers with a wide range of internal reports daily to help them improve their day-to-day tax administration.
- GST Council Operations: The GST Council exemplifies the fiscally federal and consensus-based organization that is a crucial component of the GST regime. The federal and state governments have been working together on critical legal issues. The GST Council has had 46 sessions in the previous five years, with the next one coming up shortly.
Areas of improvement
- Despite the government’s mainly successful attempts to create a unified tax for the trade of goods and services across the country, the GST system still calls for a simpler structure and a reduced compliance cost, following India’s overarching aim of ease of doing business.
- Credit must be unlocked: The goal of the GST’s implementation was to guarantee uninterrupted tax credits along the entire value chain without any losses.
- However, the previous regime’s credit limitations boost the cost of conducting business and prohibit enterprises from getting critical operating cash. Because refunds of input services are now banned, the inverted duty structure remains a barrier.
- Dispute resolution: Despite substantial gains in technology and compliance, legal disputes over GST are still in their infancy. Several instances have surfaced of inconsistent judgments delivered by regional advance ruling benches. Divergent judgments have resulted in unnecessary litigation for several firms.
- The GST Tribunal’s creation has also been significantly delayed owing to more serious legal issues with the construction, which have resulted in many writ petitions at high courts, increased costs and litigation pending periods for corporations, and other related measures.
- Expansion of the GST tax network: Because petroleum is not included in the GST, a large chunk of the economy stays tax-free. Petroleum items that come inside the GST net would reduce corporate expenses since taxes would then be fungible.
- Blockchain Technology: While GSTN has transformed the GST landscape, blockchain technology has enormous potential to fix bugs and boost GSTN’s effectiveness, given that the GST network’s unreliability for small businesses in remote locations continues to be a problem.
- Taxation of Virtual Digital Assets: The government recently announced in its budget that cryptocurrencies would be subject to a 30 percent income tax. On the other hand, the GST law on supplies related to NFT does not (yet) offer any explicit instructions in this area.
- The market for NFTs has grown tremendously as they have grown in popularity. Regarding the GST categorization of NFT transactions, the question of whether NFT transactions should be categorized as the delivery of “goods” or “services,” and if they may be regarded as actionable claims, remains unsolved. It is anticipated that this matter will be resolved quickly.
- Changes in the ease of doing business (EODB) while GST technology has kept up with the industry and governmental demands, compliance requirements are still lagging. For instance, the GST law mandates that a principal office be established in each state where supplies are sourced. Additionally, it is hoped that the “deeming fiction” provisions of cross-charge and self-supply will be reviewed, especially in cases where it is revenue-neutral.
- The government has been proactive in issuing a flurry of notices, circulars, clarifications, and orders over the last five years of the GST. To prevent needless litigation and never-ending disputes, the government has been paying attention to the concerns of stakeholders by streamlining the necessary processes. Positive shifts in taxpayer compliance and government initiatives over the next five years will guarantee a more straightforward and seamless GST structure for all parties.
- With that said, GST is at a pivotal point. The five-year GST compensation window expires at the end of this month, and states are concerned about the influx of new revenue. If we are to continue seeing forward-thinking policy reforms, it will be crucial for GST collections to stay strong and for economic growth and recovery following the pandemic to continue to show signs of recovery.
- These worries should be allayed by the tax rate rationalization efforts currently underway by a group of ministers formed last year, which will also help us stay on the course for the foreseeable future.
- GST and Fiscal Fractures
- The GST income shortfall threatens to upset the fiscal applecart for the federal government and the states. The shortfall in tax collection will put a strain on the federal and state budgets. If this revenue difference persists, the average person will be on the losing end.
- The government gave state compensations of Rs 60,000 crore from July to March in FY18 to get states to agree to the GST and get on board with it. It is expected that the Central Government will need to make additional payments totaling Rs 90,000 crore in FY19 to uphold its pre-GST commitments.
- It is understandable why the 2018 Budget released record taxation of over Rs 90,000 crore in the form of capital gains tax, a rise in customs duty, cess, and surcharge. States are wary of including petroleum goods and real estate under the GST’s purview because of the revenue decline.
It’s difficult to Adapt to the IT Ecosystem
Small businesses, or SMEs, are a major driver of the Indian economy. It would be unrealistic to expect small company organizations to switch to an online IT platform and file returns without any mistakes. For the majority of our working population, who has little practical expertise with IT solutions, it is a difficult assignment. For micro-small-medium-sized businesses, the cost of SRP deployment is a big challenge.
The government wants to secure monthly earnings of Rs 1 lakh crore to create a frictionless and less burdened GST. It will be fascinating to see if the government still has the will to punish tax cheats and other companies who engage in anti-profiteering practices harshly.
The GST was envisioned as India’s second chance to change its fate. The Indians will now have to eat up a large number of taxes as part of the 2018 financial budget. The only option to generate operating income for a complex system like GST in the nonlinear Indian Demographics is to increase taxes.
edited and proofread by nikita sharma