The locality to the west of Mumbai’s Masjid Bunder railway station, where Panjabi’s wholesale business is stationed, is a classic example of a bustling cash-driven market transiting towards banking. Panjabi explains how almost every merchant in the area is struggling with higher working capital needs, because buyers, who are retailers from across the city, have started to insist paying through bank transfers, but then the payments are also delayed compared with cash settlements earlier.
In Surat, a textile city which fiercely protested against the introduction of the GST in July 2017, the cost of tax compliance for a small trader has risen by about Rs 50,000 a year, according to Champalal Bothra, secretary of the city’s federation of textile traders association, called FOSTTA. The city, located 280 km north of Mumbai, lost customers, looms and jobs during the last two years. Yet, it has now accepted that GST is here to stay. “Our demand now is a reduction of the GST rate on textiles to 1% (from 5%),” Bothra. says over phone.
Earlier, the city was demanding its total withdrawal. Textiles, like agriculture, were not taxed earlier, although there was an indirect tax on yarns.
Twenty seven months after India’s biggest and boldest tax reform hit the ground, the challenges have spread from the discontentment of small traders to more systemic issues— slow growth of GST collections, the emergence of nation-wide fake invoices racket and the failure to reach a consensus on rationalisation of rates and the inclusion of items such as petroleum products and electricity in the GST’s ambit.
Firstly, the tardy growth of the GST revenue collections has pushed the states and the Centre into a corner. In the month of August, the GST revenue collections stood at Rs 98,202 crore, a notch below the psychologically important one lakh crore mark. It was up by an unimpressive 4.5% compared to August 2018. Compared with this year’s high of Rs 113,865 crore collected in April, the revenue in August was down 13.7%. One has to however account for the fact that demand in August — a month before the festive shopping spree begins — has traditionally been sluggish. This year, due to the ongoing slowdown in consumer demand, the effect is amplified.
Meanwhile, several states have urged the 15th Finance Commission to extend the compensation period under GST beyond the mandated year of FY 2022. According to Goods and Services (Compensation to States) Act, 2017, if a state’s revenue growth falls below 14% in a year, the Centre would bridge the shortfall for the first five years. The compensation is paid to the states once every two months out of a cess collected on taxes on sin and luxury goods. The Centre’s compensation to states in June-July 2019, stood at Rs 27,955 crore.
The second major challenge that the GST is facing today could potentially drag down total revenue. Early this week, the Directorate General of GST Intelligence unearthed a Rs 400 crore fraud of overvaluing and faking invoices to claim refund of input tax credit. The input tax credit is a mechanism that allows businesses to receive refunds on GST paid for the purchase of goods or services so as to prevent cascading taxation.
“We have decided to introduce stringent mechanism including linkage of Aadhaar to checkmate fake invoices and fraudulent refund claims. Shortfall of revenue (in August) is an exception possibly because of overall slowdown and stepping up of vigilance against frauds,” Bihar Deputy Chief Minister Sushil Kumar Modi told ET Magazine. As he holds the state’s finance portfolio, Modi is an ex-officio member of the GST Council, the apex decision-making body comprising finance ministers of both the Union and state governments. He further adds that physical verification of the entities with mandatory geo-tagging of their establishments could be an option to checkmate fraudsters.
In the recently unearthed scam, as many as 25 non-existent suppliers based out of Delhi, Uttar Pradesh, Madhya Pradesh, Assam and Bihar, issued fake invoices to exporters based in National Capital Region which in turn availed refunds in connivance with Gujarat-based Kandla Special Economic Zone, according to reports.
The third challenge that the GST regime is facing today is the states’ unwillingness to bring in items such as petroleum products and electricity under the GST, and also their lack of consensus on matters such as reduction of number of rate slabs (main ones being nil, 5%, 12%, 18% and 28%) and tackling of the contentious dual rate item—the lottery.
“GST must exclude none, be it electricity or petroleum,” says Sudhir Kapadia, partner and national tax leader at EY India, adding that the formalisation of the economy post the GST rollout has also seen a spurt in personal tax mop-up.
At present, there’s no official data available to show the present GST tax collections vis-avis the revenue being collected by 17 taxes such as VAT, Octroi, service tax, luxury tax etc which got subsumed once the GST was rolled out. Kapadia, however, believes that the revenue generated by the GST will be “more or less the same” as in the past, though there are reports indicating a substantial lower collection under the GST regime as compared to the past taxation system combining the Centre and the states.
“GST has been good for organised players. It helps those with direct distribution and supply chains,” says Saugata Gupta, CEO of Marico Ltd, a consumer goods company with interests in health, beauty and wellness. In fact, the organised players which were regularly paying indirect tax under the previous regime, didn’t feel the pinch much during the switchover.
To be fair, in the last two years, the GST Council has responded to the concerns of businesses, modifying select processes and tax rates. For a company with less than Rs 2 crore annual turnover, there is now no need to file monthly or quarterly returns though it has to pay the tax every month. Further, many items such as nuclear fuel, non-branded paneer, non-branded natural honey, jaggery, salt, agricultural implements, sanitary napkins and rakhi, all of which originally attracted GST, were later shifted to the zero slab, meaning no tax would be levied on them.
The minutes of the GST Council meetings, some of which are available in the public domain, however, demonstrate serious disagreements among states on several contentious issues including tax concessions on electric vehicles, gold, mandatory e-ticketing on movie halls, etc. The states are divided in the case of lottery, the only item that still attracts two tax rates — 12% when sold in a state and 28% when sold outside. Punjab and West Bengal were advocating a continuation of dual rate citing an ongoing court case whereas states such as Sikkim, Assam, Goa and Maharashtra pitched for a single rate, according to the minutes of the meeting held on June 21. Also, there were objections on Tamil Nadu’s introduction of an entertainment tax over and above the GST, the same set of documents reveal.
Columnist and former chief commissioner of income-tax, Hardayal Singh, says that there is an enormous potential of GST, but its design is still flawed. “Small and medium enterprises and small exporters have struggled to cope with this tax. Taxpayers have found it difficult to claim input credits, the basic foundation on which the tax rests. Payments once misclassified as SGST, CGST or IGST are impossible to recover. Small businessmen are required to file returns and pay late fees even when they are not liable to pay this tax,” he explains. SGST (State Goods and Services Tax), CGST (Central Goods and Services Tax) and IGST (Inter Goods and Services Tax) are components of the GST.
Suresh Surana, founder of RSM India, the Indian associate of international accounting firm RSM International, adds: “Given the complexity of the economy of India and the social and economic stratification, we must give credit to the GST regime that today one can fairly assess what is the indirect tax liability for a business in India.” But, he adds, there are glitches that need immediate attention.
Firstly, Surana says, compliance is still costly and unnecessarily complicated. For instance, any company operating throughout India needs to register and be assessed in all the states where it operates. In case of services, where the payment and delivery of service do not happen simultaneously (e.g. advance booking for travel), the GST credit has to be held back by the party providing the service. There are also business items that do not qualify for input credit, such as real estate, automobiles, food and beverages et al.
The biggest irritant for most traders, however, is the delay in refunds. At the time of implementing the GST, it was assured that 90% of the refunds of GST (on non-utilised input credits, exports, provisional assessment exceeding final assessment) would happen in seven days, with only 10% being held back. But that’s no longer the case. It’s believed that the recent unearthing of fake invoices and fraudulent practices to corner input tax credit may only lead to more scrutiny, and more delays. Tax payers say that the delays often force them to resort to human interfaces, a practice that is a slippery slope towards bribery.
Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, concedes that the GST is still a work-in-progress. Before implementing the tax, he says, the government had two options — either to continue deliberating for years before arriving at a consensus or to get going and iterate. The government opted for the latter.
Debroy is now pitching for bringing all items and small companies under the GST ambit, in addition to undertaking a radical change in tax rates. Presently, the taxpayers with aggregate annual turnover of up to Rs 40 lakh are exempted from registering under GST. For those based in the Northeast, the threshold is half, at Rs 20 lakh.
“I would have been happier if there was only one rate for all items. That is an ideal scenario. But we know that is not going to happen. My view is, we should have three GST rates — 6, 12 and 18%. This formula will make us still lose revenue unless volumes compensate it,” he says.
But that has a potential risk. In Debroy’s formula, there will be no zero slab, meaning the GST will be levied on basic items from bread to bindi and salt to sindoor. The economist-turned PM’s adviser stands his ground. “It’s the job of direct tax to take care of such issues. If you try to do it through indirect tax, you simply complicate the system,” he says.
It’s clear that GST has significant ground to cover before it can live up to its promise and potential.