GST Council eases rules: A pain reliever indeed, but GST not a good and simple tax just yet

Has the slew of changes in the goods and services tax (GST) regime okayed during the 22nd meeting of the GST Council on Friday made it a good and simple tax? Has it ironed out all glitches forever? Not quite – there’s a long, long way to go for that.

And yet there is no getting away from the fact that the decisions arrived at the meeting are hugely significant in terms of easing the pain of compliance and transition for specific groups. A group of finance ministers has been set up to look into four other issues related to rates and procedures. All this shows open-mindedness in the Council to understanding and addressing the problems of these groups and undertaking course correction.

This is a big plus and far more significant than the rate cuts on 27 items that were also announced (this bit, in fact, is a big negative in Friday’s exercise). Remember GST implementation is only two-months-old and the Council could well have decided to wait things out a bit more. Our politicians are known to do this, especially when all the blame for shoddy implementation will fall on just the central government.

File image of Prime Minister Narendra Modi. PTI

File image of Prime Minister Narendra Modi. PTI

The exporters and small and medium businesses have been the biggest gainers. Exporters not only get immediate relief in terms of receiving pending refunds (amounting to Rs 65,000 crore) processed in this month itself, but a long-term solution – the e-wallet, which is to be in place by 1 April – has also been worked out. Goods exporters have to pay only 0.1 percent GST on inputs procured from the domestic market. Exporters are waiting to see how the e-wallet is designed and implemented but they have heartily welcomed the concept.

For small and medium enterprises, a huge compliance burden has been taken off by raising the ceiling for availing of the composition scheme from Rs 75 lakh to Rs one crore; all businesses with turnover up to Rs 1.5 crore can now file their returns quarterly, instead of monthly at present; firms and independent professionals with turnover below Rs 20 lakh do not need to register for GST just because they have inter-state transactions; the reverse charge mechanism has been suspended till end-March 2018. In addition, firms with turnover below Rs 1.5 crore need not pay GST on advance payments but only at the time of sale.

Not allowing the benefit of the composition scheme to firms providing an exempt service as well as to those with turnover below Rs 20 lakh if they undertook inter-state sales/transactions was hitting them hard. Even a single Rs 1 lakh inter-state transaction in one financial year pulled them into the monthly returns quagmire. This immediately shrunk their client base to just the state they operated from. This was particularly galling for service providers, given that information technology has made even national boundaries redundant. Fortunately, the GST Council realised the unfairness of this. Small firms and independent professionals can now breathe easy.

Suspending the reverse charge mechanism till April is also a big relief. Under this mechanism, a registered firm procuring supplies from an unregistered entity had to pay GST for the latter and then claim refund. Unwilling to bear this burden, many registered firms were putting pressure on their small suppliers to register for GST or limiting their procurement to only registered suppliers. What replaces it or how it is tweaked in April 2018 needs to be seen.

These much-needed changes were needed because, as Finance Minister Arun Jaitely pointed out, over 90 percent of the taxpayers are these small and medium enterprises whereas over 90 percent of the tax is paid by large firms. So chasing lakhs of small firms to make them comply made little sense for the government; all it would have led to would have been harassment by tax officials. Besides, as Anil Bharadwaj, secretary general of the Federation of Indian Small and Medium Enterprises points out, having over 90 percent of the taxpayers shift to a quarterly returns system will immediately reduce the burden on the GSTN network, which was crashing regularly during filing time. Hopefully the glitches will be ironed out by the next quarterly returns filing time.

One major disappointment with Friday’s exercise is the continued tinkering with rates. Tweaking rates on 27 items may please particular constituencies but go against the spirit of GST and will only encourage unhealthy lobbying.

What should have been flagged off is an exercise at rationalising the slabs in a phased manner. Five slabs is a bit much, even allowing for the complexity of introducing GST in a complex and varied country like India, with 30 state governments and Union Territories, all ruled by different parties. Bharadwaj feels the rate cuts should have been strategic, designed to rationalise the slabs. That, unfortunately, has not happened. Khakras may be making news for having GST reduced, but there’s a difference between branded and unbranded khakhras. Input A used for X is taxed at one rate but at another rate when used for Y.

That is why this will not be a good and simple tax till India’s politicians at the centre and the states want to wield taxation as a political weapon. And, of course, the thorny issue of bringing petroleum products into GST has been side-stepped entirely.

Besides, there are other substantive issues that need to be addressed. The fine print of some solutions worked out will have to be examined. Friday's exercise was a pain reliever. Reconstructive surgery to make GST as close to the ideal as is possible in India remains to be done. It needs to be done. There’s no getting away from it.

Updated Date: Oct 07, 2017 15:36 PM

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