An overarching rationale behind the Goods and Services Tax [GST] – introduced on July 1, 2017 – was two-fold. (i) give boost to tax revenue and (ii) relief to consumers by way of lower prices. The initial indications do not seem to be encouraging.
First, there are about 65 million businesses in so called ‘informal’ sector. They transact mostly in cash and do not maintain records, hence were able to escape payment of tax. Even in the ‘formal’ sector, retailers doing their purchases and sales in cash were avoiding payment of sales tax/value added tax [VAT]. All of this would add up to billions of transactions remaining outside tax net.
Further, since apart from excise duty [paid by manufacturer at the time of goods leaving the factory], sales tax/VAT is included in maximum retail price [MRP] which is charged from the customer, this was leading to an abhorrent scenario. The retailers were charging sales tax/VAT from customers but were not depositing with the authorities. In other words, tax component was adding to their profit/income on which they won’t pay income tax either.
The intent of GST was to levy tax on all those billions of transactions and ensure that the amount collected from customers was deposited in full. Since, this tax is levied on value addition at each stage in the supply chain with a proviso for credit in respect of tax paid on purchase of inputs, it is incumbent for every entity to be part of GST network [GSTN] or else he won’t get input tax credit.
So, what is the position on ground zero? Although, it is still three months since the launch of GST and one would need to allow at least a full year to gauge the impact, initial trends do give an idea of how things are expected to unfold.
Under the extant dispensation prior to July 1, 2017, there were about 7 million assesses under excise duty, service tax and sales tax/VAT all clubbed together. Post July 1, 2017, in addition to all of them having to register under GSTN [sans those who have closed the shop], about 2 million more businesses have got themselves registered. This is a mere 3% of the 65 million entities in the informal sector.
The rules provide for an entity having annual turnover less than Rs 2 million to be exempt from registering under GSTN. Even assuming that entities having this much turnover are half of the total, then also, of the remaining 32.5 million only 6% have registered! What about the number who have filed return and revenue collection?
In July, 2017, the businesses uploading their return were about 4 million or 62% of the eligible tax payers under GST and 45% of total number registered. As regards revenue collection, this was Rs 92,000 crores during July and Rs 90,000 crores in August.
However, a big worrying point is a substantial amount of input tax credit. For the month of July, claim of about Rs 65,000 crores is giving jitters to the department. It is assessing the correctness of the claim. What if the amount even as per its own determination is substantial say, Rs 40,000 crores plus [if not what is claimed]? This could be dismissed as one-off event as a big portion of it was against stocks with the trade on which tax was paid under previous dispensation and GST Council agreed to compensate under current regime.
But, the worries do not stop here. According to the revenue secretary, Hasmukh Adhia, a good portion of tax collection during July and August was on account of IGST [integrated GST] even as the stocks were transferred from the manufacturing state to those states where consumption has to take place. The procurers of these products will claim credit for IGST paid when they sell in the consuming state. This could affect the net revenue collection.
Yet another matter of serious concern is that an overwhelming share of tax is contributed by a small percentage of large assesses even as majority of those registered contribute little. This is completely out of sync with the underlying philosophy of GST i.e. to bring about a big surge in the tax base.
As regards relief for the consumers, the objective of GST is to reduce prices by eliminating the cascading effect of taxes/duties and high transaction cost germane to the erstwhile dispensation. These benefits too are getting offset due to high GST rates particularly for items which fall in the 18% and 28% slab – exacerbated by levy of cess on items falling in the 28% slab.
To make matters worse, some dealers are cheating customers by charging tax over and above the MRP even though the price is inclusive of GST. Even though, the proposed anti-profiteering authority as envisaged by GST Council [its aim is to ensure that the benefit of tax reduction due to GST is passed on in full and exploitation of consumers is prevented] is already in place, the monitoring and surveillance machinery leaves a lot to be desired.
The mute response to GST has been attributed to glitches in implementation viz. tedious compliance requirements especially for small businesses, low threshold limit for entities wanting to avail of composition scheme, treatment of tax exemption to exporters under GST regime etc. In its last meeting held on October 6, 2017, the Council took a number of decisions to address these problems.
But, the real problem lies in faulty design of GST architecture viz. too many rate slabs [0, 5%, 12%, 18%, 28% plus cess on items in highest slab], cumbersome classification of hundreds of items and services in different slabs; sub-classification of same item in different slabs depending on value, levy of cess and exclusion of most crucial items like crude oil, natural gas, real estate, alcohol etc. This has taken away the sheen [or ‘simplicity’] out of what Modi euphorically described as “Good and Simple Tax”.
In sync with his characterization, if only the Council can come up with a ‘single’ rate at a modest level say 12% and include all items, the results will truly be on expected lines.