5 years of GST regime - more hits than misses

SUBHASHIS MITTRA

New Delhi, Jul 3: Billed as a landmark reform to remove a complex system of indirect taxes with ‘one nation, one tax’ for every product or service, the Indian Goods and Services Tax came into force on July 1, 2017. 

It was meant to replace the earlier regime, where the Centre could tax goods up to the production or manufacturing stage, while states collected taxes on the sale or distribution of goods. 

Under the GST, both the Centre and the states can tax the entire supply chain in both goods as well as services – right from production to distribution. 

But, the moot question is whether it has achieved that objective in the last five years.

Though certain issues are still outstanding, the overall objective of achieving a unified indirect tax system has been achieved, by and large.

Implementing a unified tax system for a country as large and as densely populated as India was a mammoth task, but the on-boarding of taxpayers from the old tax regime to GST was done very efficiently. 

As on April 30, 2022, there were 1.36 crore tax payers registered on the GSTN, of which 1.17 crore are normal taxpayers and 16 lakh are those paying taxes at a lower rate. 

The taxpayer base has expanded after GST implementation, with many companies asking their suppliers to register themselves to receive input tax credit seamlessly. 

Tax collections were impaired by economic slowdown in FY20 and the pandemic, but it has improved since then to achieve record growth of over 27 per cent in FY22. 

Digitisation of the entire system made it easier to spot and check tax evasion.

The recent meeting of the Goods and Services Tax (GST) Council in Chandigarh was perhaps one of the most important since implementation of the new indirect tax regime. It not only marked the completion of five years of implementation, but also had a wide-ranging agenda. 

The meeting saw several states arguing in favour of extending the compensation payment, though for different time periods. No decision in this context was taken in the meeting. 

The government has already extended the collection of compensation cess, which will be used to repay the debt raised over the last two years to compensate the states. 

But, extending the compensation payment would be fairly complicated. 

Besides amending the law, the Council would have to decide the growth rate at which the states will be compensated. 

Clearly, the 14 per cent growth assumption was not practical. Further, a new mechanism will need to be devised by which the states can be compensated because the compensation cess collection will be used to repay the debt raised to compensate the states over the past two years. The imposition of additional cess could further complicate the tax structure.

While the GST administration has moved forward with alacrity, it is still a long way to go to achieve the full potential of GST and make it a true 'good and simple tax'.
  
With petrol, diesel, ATF outside GST, a large part of the economy is still not covered by the indirect tax regime. Inclusion of petroleum products under the GST net, could reduce cost for companies, tax experts say.
  
There is emergence of newer asset classes like the virtual digital assets (VDA) or cryptocurrency with emerging technology.

Also, there is a need for clarity on whether they would be classified as supply of 'goods' or 'services' and what would be the tax rate on them.
  
Tax rate rationalisation is something which would happen sooner or later. Current inflationary concerns may have derailed the plans to tweak rates and GST slabs, but it would eventually be a reality as both the Centre and states need revenues and lesser slabs would mean a simplified tax regime.
  
Besides, the decision makers in the Council too have to work out a solution as state governments, from July 1, 2022, stare at a stoppage of compensation for revenue loss due to GST implementation. 

When GST was rolled out on July 1, 2017, states were promised a compensation, from the cess fund, for five years if their GST collection falls short of the 14 per cent compounded revenue growth.
  
Most states have sought an extension to the compensation mechanism and a final decision is likely to be taken at the next GST Council meeting in Madurai in August.

Thus, the GST - which subsumed 17 local levies like excise duty, service tax and VAT and 13 cesses at the stroke of midnight on July 1, 2017 - has completed its half-a-decade journey with many hits and some misses.