The Modi government’s “good and simple tax” has become a confusing mess

Ain’t so easy.
Ain’t so easy.
Image: Reuters/Rupak De Chowdhuri
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The Narendra Modi government seems to have tied itself into knots over its biggest reform in recent years, the goods and services tax (GST).

Launched on July 01, the new regime was aimed at replacing the erstwhile multi-layered and complicated tax system. However, a series of U-turns, tweaks, and contradictory statements from senior government officials since its launch indicate that the GST is probably as confounding as the old system.

The latest sign of the confusion surrounding the new tax system came from none less than the government’s revenue secretary Hasmukh Adhia himself.

On Oct. 22, in an interview to news agency Press Trust of India, Adhia said the GST rate structure required “complete overhauling”. A day later, the interview was revised, stating that he had only suggested the “need for some rejig” in rates.

Too many teething troubles

The GST had been in the making for 17 years. Yet, before its roll-out, the government acknowledged that there may be teething trouble. 

“Everyone would agree that there is lot of scope for improvement and it could have been planned and executed in a far better way,” said Hrishikesh Datar, CEO of Vakilsearch, an online legal services firm helping small entrepreneurs become GST-compliant.

The first and most avoidable hiccup were the IT glitches. “Technology is the backbone of this reform as the filing now needs to be done online. The IT infrastructure could have been tested more vigorously and it is a basic thing that has been overlooked and needs to be strengthened,” Datar said. Several traders have not been able to file returns and pay taxes before the deadline due to glitches on the government website. 

That’s not all. The extensive tinkering since the rollout—and more changes that are likely to follow—suggest that the issues are fairly deep-seated.

A month into its introduction, the government slashed taxes on 19 services, including third-party services performed by textile mills and government contracts. Earlier this month, it cut the slabs for 27 items like food products, fibre, and e-waste. Including items such as khakhra, a traditional snack in the poll-bound state of Gujarat, in this list was even viewed as a political move. Meanwhile, the last date to file GST returns was revised for July and August

Under fire for choking small traders, the government has also allowed businesses with an annual turnover of up to Rs1.5 crore ($ 230,964)t o file returns once in a quarter instead of every month as required earlier. Another issue is the tax rates. “For instance, textiles and fabrics are charged at 5% under GST but yarn is taxed at 18%, so textile manufacturers ultimately don’t have clarity on how to price their products,” said Archit Gupta, CEO of ClearTax, an online tax-filing company.

Moreover, since the GST system is entirely online and linked across the supply chain, in order to get tax breaks, everyone associated with a particular business or sale of goods or services needs to upload the correct documents. Even if one link fails to do so, the whole process goes awry. ”The idea behind this is to increase accountability to ensure that everyone files taxes. However, some relaxation in the first few months in this rule are required to ensure that it creates less havoc for the ones who are abiding by the rules,” added Datar.

Meanwhile, the frequent policy changes are partly responsible for taxpayers delaying their filings. “It is a complicated tax structure and people are still trying to understand it. Especially the smaller businesses are still grappling with it as now these returns can only be filed digitally. On top of it there are frequent changes and relaxations and deadlines are getting pushed. Therefore, lot of people are delaying the filing as they expect more changes,” said a Mumbai-based chartered accountant, requesting anonymity. Less than four million assesses filed their GST returns in September, compared to nearly seven million expected. This isn’t good news for a government that was expecting more people to come under the tax net to help boost revenues.