One year of GST: Tax regime is anything but good and simple; govt can simplify it to improve ease of doing business

Editor's note: It has been a year since the Narendra Modi government rolled out the Goods and Services Tax (GST), on 1 July, 2017. The introduction of the indirect tax regime marked the end of over a decade of wrangling, when politicians struggled to build consensus across party lines. Firstpost is publishing a series of articles wherein experts will analyse the triumphs and the pitfalls of the roll out of the GST.

The Goods and Services Tax (GST) was introduced on 1 July, 2017, and is about to complete one year in operation. Let’s look at how things stand a year later.

1) India has four non-zero rates of tax when it comes to the GST; 5 percent, 12 percent, 18 percent and 28 percent (Actually, it has six non-zero rates of tax given that gold is taxed at 3 percent and precious stones at 0.25 percent). Over and above this, there is a special cess on certain goods categorised as luxury and sin goods. Hence, we have many rates of GST. The Indian bureaucrats and politicians, have designed one of the most complicated GST systems in the world.

India Development Update, published by the World Bank, in March 2018, points out that only four countries in the world, other than India, use four or more rates of GST. This is from a sample of 115 countries. These four countries are Pakistan, Ghana, Italy and Luxembourg.

49 out of the 115 countries in the sample use a single rate and 28 countries use two rates. India is clearly in a minority here.

2) More rates of tax make the system inherently more complicated. The argument offered against this is that the earlier system was more even complicated. This might be true for the goods part of the system, but when a new system is being designed from scratch, it needs to be as user-friendly as possible. The GST system is clearly not user-friendly.

3) The complicatedness of the system comes out from the fact that in 2017-2018, the rate of compliance stood at 64.6 percent. This basically means that more than a third of those who need to file GST returns did not do so during the last financial year.

4) The top rate of tax of 28 percent (without considering the cess on sin and luxury goods) is the second highest in the world, from the sample of 115 countries, considered earlier. Higher rates are another reason which put off people from paying the tax.

Representational image. AFP

5) The Harmonised System of Nomenclature (HSN) which allocates codes for every conceivable good, runs into all of 438 pages and has 18,306 entries. Of course, bureaucrats would have sat and thought through this and come up with every conceivable product category that they could think of.

Despite this detail, there has been confusion regarding the categorisation of some goods. Is Appy Fizz an aerated drink or a juice? Is Red bull an aerated drink or an energy drink? All this could have been avoided if there were one or two rates of GST.

6) Having one or two GST rates would mean a simple system. And bureaucrats and chartered accountants, do not like simple systems which ordinary people can understand. A simple system does not allow them to draw their rents.

In fact, if there were only two rates of tax, one for goods and one for services, a 438-page HSN book would no longer be required. This would clearly mean lesser work as well as relevance for the bureaucrats and the chartered accountants. And that is something that they clearly don’t want.

7) The GST was marketed as one nation one tax. But that has clearly not turned out to be the case. Businesses with presence in one or more state need multiple GST numbers. They need to file multiple GST returns as well. They also need to have multiple GST logins and passwords.

This is something that clearly does not help the ease of doing business.

While this is a major systematic flaw, it can be simplified by giving businesses which have presence in multiple states, a single login and password, so that they don’t have to login into the GST website multiple times to file their returns.  Information technology can be used to make things easy for them.

8) Continuing with GST being marketed as one nation one tax, the e-way bill provisions have been made mandatory from 1 April, 2018. While the e-way bill provisions for interstate movement of goods (i.e. between states) are uniform, the same cannot be said about provisions regarding intrastate movement of goods (i.e. within a state). This again creates problems for businesses operating across multiple states.

9) The complicatedness of the system can also be made out from the fact that the GST council has put out 158 notifications till date. This includes tax and rate notifications. Having said that, it must be said that rate of issuing of notifications has fallen in 2018.  These notifications have been issued at the central level. There are other notifications at the state level.

10) In the years to come, the real challenge will be to bring alcohol, real estate and electricity, under the ambit of GST. Alcohol remains a huge source of revenue for state governments, particularly in southern India. Real estate remains a huge source of illegal wealth for politicians, all across India. Any cleaning up of the sector will hurt that. These are long term challenges.

11) The current challenge is to start taxing petroleum products under the GST. As of now, even though petroleum comes under the GST, it is taxed at zero percent. Given this, in order to start taxing petrol, diesel, etc., under the GST, only a consensus of the GST council (a body which primarily consists of the finance minister of the union government and the finance/taxation ministers of the state governments) is required. Bringing petroleum products under the GST is a must primarily because currently state government taxes on petrol and diesel, are ad-valorem (i.e. a percentage of the price, and not a fixed tax). More than that there is double taxation, something which the GST will correct.

Of course, this would mean loss of revenues for the state governments, which the central government will have to compensate for. It can easily do that by trying to monetise the land bank of loss-making public sector enterprises.

12) The real challenge for GST will be in 2018-2019, the current financial year. The central government expects to earn Rs 6,03,900 crore through the tax during the course of the year. This means an average collection of Rs 50,325 crore per month. In April 2018, the central GST collected stood at Rs 28,797 crore, way short of what needed to be collected as per the budget.

These numbers can only improve if the GST system is simplified. The way things currently are, there doesn’t seem any chance of that happening.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Read other stories from the series here:

One year of GST: The roller-coaster ride is over and businesses are now prepping to switch to cruise control

One year of GST: Integration of unorganised sector is major achievement; govt must ensure transmission of lower taxes to consumers

One year of GST: Government could push a raft of anti-evasion measures if compliance or collections dip

One year of GST: The tax regime is helping reduce shady realty transactions, but property prices aren’t down

One year of GST: With compliance at 69%, tax collections have begun to stabilise; time to make process smooth

One year of GST: Indirect tax regime is a great success; has led to growth in GDP, says Adi Godrej