As the clock struck midnight on July 01 last year, a packed Indian parliament ushered in the country biggest ever tax reform with a gong: the unified goods and services tax (GST), in the making for over 17 years, subsumed a bevy of multiple taxes and levies.
The Narendra Modi government had cautioned about the new regime’s teething troubles. However, coming within months after the disruptive move to demonetise two high-value currencies, the rickety implementation of the GST singed small traders and confounded the big ones. A year on, even umpteen U-turns and nearly 400 tweaks haven’t really sorted out the complex issues in the new tax sytem.
In terms of revenue, India collected Rs7.41 lakh crore ($110 billion) in indirect taxes under the GST in financial year 2018. This year’s target has been set much higher at Rs13 lakh crore, assuming a 20% rise in the average monthly collections.
However, to achieve this, the government must focus on simplifying the GST and widening the tax-base, analysts say.
Time for GST 2.0
Fewer slabs: Earlier this year, the World Bank noted that among the 115 countries that have a unified tax system, India’s is the most complex and with the second-highest rate. After all, the GST has four tax slabs—5%, 12%, 18%, and 28%—while 49 other countries have just one. This is besides the many cesses and levies in India, like those on tobacco and tobacco products, luxury cars, and aerated drinks.
However, the Narendra Modi government has ruled out a uniform tax slab. ”It would have been very simple to have just one slab but it would have meant we could not have food items at zero per cent tax rate. Can we have milk and Mercedes at the same rate?” Modi told Swarajya magazine.
How about knocking down the number of slabs then?
“There is a demand for further rationalisation of commodity rates and it will eventually converge to one or two slabs,” Bipin Sapra, partner for indirect tax at tax consulting firm EY, told Quartz.
Simplified processes: The GST began with a mandatory filing of three returns every month by businesses, apart from an annual return. This was found extremely daunting and brought down to one return a month.
“It still remains very complicated for many people…The whole process needs to be made more simpler and even the integration of the tax portals needs to be improved,” said Pronab Sen, a former chief statistician with the government of India.
IT infrastructure: A weak information technology backbone has been one of the GST’s biggest drawback. The months since its rollout have thrown up frequent glitches in the Goods and Services Tax Network (GSTN) portal, resulting in huge losses for traders missing deadlines. A system touted as completely paperless ought to have had a much stronger focus on its technological support system.
Tax base: The government must now bring more products under the GST to widen its tax base. Items like petroleum products, alcohol, and immovable property do not draw the GST as of now.
“With the input of these products being subject to the GST and the output outside its coverage, the tax structure applicable to these goods and sectors, as well their compliance-related requirements, have become fairly complicated,” said Pratik Jain, partner and national leader of indirect tax at PwC, in a report released on June 29. “This is in effect defeating the government’s purpose in implementing the new tax regime.”
Clearly, it will be a while before the GST process is foolproof, warns Archit Gupta, CEO of ClearTax, an online tax-filing company. “In a massive tax overhaul like this, it will take at least another six to 12 months for processes to become more steady. Right now businesses should be prepared for more changes, which may be for the good.”