Theme : Economy
Paper : GS - 3
TABLE OF CONTENT
- Context
- Goods & Services Tax
- Components of GST
- Reasons for Introducing GST
- Positives Resultant of GST Implementation
- Negative Resultant of GST Implementation
- Road Ahead
Context : The monumental indirect tax reform, the Goods and Services Tax (GST), completed five years in existence in July 2022.Here we analyze the impacts of GST on the Indian economy and whether the reform has achieved its stated objectives or not.
Goods & Services Tax :
- GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
- The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
- It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
- Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.
Components of GST :
There are three taxes applicable under this system:
- CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra).
- SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra).
- IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)
Reasons for Introducing GST :
- Offer a win-win situation: The profound idea behind the implementation of GST was that it would offer a win-win situation for all stakeholders, be it the governments at the Centre or States, taxpayers, or tax administrators.
- Address previous tax regime challenges: Previous indirect tax regime was marred by cascading effect of taxation, high tax evasion and informalization. GST was a solution for all these negativities.
- Benefit all stakeholders: Manufacturers and traders were to benefit from fewer and easier electronic tax filings, transparent rules, cost reduction and ease in record maintenance. Consumers would be paying less for the goods and services, and the government would generate more revenues by plugging revenue leakages through the adoption of efficient data analytic tools.
Positives Resultant of GST Implementation :
- Reduced cascading effect: GST has mainly removed the cascading effect on the sale of goods and services. Removal of the cascading effect has impacted the cost of goods as the GST regime eliminates the tax on tax, and the cost of goods decreases.
- Increase in the number of registrants: The ease of payments has improved over time with the technical glitches having been slowly sorted out, leading to a record number of GST registrants – increasing from 1.08 crore in April 2018 to 1.36 crore in 2022.
- Increased revenue generation: The revenue gains have been significant. The system witnessed record GST collections on a month-on-month basis. For the past 11 months, GST collections have crossed the Rs 1 lakh crores mark.
- Improved EDB rankings: The introduction of GST has simplified business processes, tax administration and compliances in India. The Ease of Doing Business Index, a measure used by the World Bank Group in which ‘paying taxes’ is one of the important parameters used to determine country rankings, has shown significant change. India’s ranking during the last three years showed a sharp upward momentum from 100 in 2018 to 77 in 2019 and 63 in 2020 – a jump of 37 places in 3 years.
- GST and technology: With the introduction of GST, the country adopted a pan-India technology platform. After the initial hiccups, the GST portal started handling registration and compliance functions with consummate ease. Also, the integration of the Customs/SEZ portal and sharing of data with other departments/regulators within the government helped explore the unexplored areas of data analytics and audit.
- Robust unified e-way bill system: introduced in 2018, has facilitated dispensing with the archaic check-posts, thereby reducing supply chain lead time and associated costs for companies and helping the tax administration monitor tax compliances and potential revenue leakages better.
- The introduction of e-invoicing: from October 2020, provided a system that allows real-time data reporting by taxpayers. The availability of real-time and relevant data helped in the detection of tax fraud and curbing evasion. Further, the standardized format and data reporting allowed the interoperability of data for multiple reports and filings.
- Rate reshuffling: One of the important principles of the GST is a simplified rate structure. The government has made attempts to reshuffle the rates, with the number of goods in the 28% and 5% tax brackets coming down considerably in the previous five years.
Negative Resultant of GST Implementation :
- Politics influence the decision of the GST Council: Ideally, political affiliations should not matter in a Council set up to decide indirect taxes. During the Covid period, several of the 14 members of the groups who belong to parties different from the party ruling in the Centre, requested the Finance Minister to convene the GST meeting to help them manage their finances but none of the 17 members of the ruling group deemed it necessary.
- Increase in inflation: During the 12 months preceding GST implementation, the Consumer Price Index (CPI) inflation was 3.66%, while it increased to 4.24% post-GST in the next 12 months.
- Provisions for unregistered GST suppliers: The micro, small and medium enterprises (MSME) sector has been affected by the GST reforms because the large units have been reluctant to buy from them in the absence of input duty credit.
- Reduced GDP rate: GDP growth rate, instead of rising, has fallen quarter-on-quarter from 8% in Q4 of 2017-18 to 3.1% in Q4 of 2019-20, just before the pandemic hit. Of course, the entire decline cannot be attributed to GST but it has contributed substantially to it by damaging the unorganized non-agriculture sector which is 31% of the GDP.
- Operational difficulties: Due to the complexities and lack of clarity in official pronouncements, businesses and chartered accountants complain of difficulties. A company that operates nationally has to file forms monthly for each state of operation – adding up to hundreds of forms.
- Not truly one nation, one tax: While a category of good or service has one tax rate nationally, across goods and services there are many tax rates (at least 8). This goes counter to the requirement of GST that there be one tax rate but in an economy like India that is not feasible given the poverty and diversity of production structures.
Road Ahead :
- The gradual widening of the fiscal capacity of the states has to be legally guaranteed without reducing the Centre’s share.
- The recommendations of the GST Council “should be a product of a collaborative dialogue involving the Union and States”.
- As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations.
- The Council should focus on administrative changes, which can be introduced in the areas of assessment under GST, advance ruling mechanism, constitution of tribunals, etc. which shall ensure timely disposal of issues and will also provide certainty to the industry.
FAQs :
1. What is GST ?
Answer : GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
2.What are the components of GST ?
Answer :
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CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra).
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SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra).
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IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)