GSPs: An enabler to ‘Good & Simple’ Tax

We recently celebrated the first anniversary of the Goods and Services Tax (GST), arguably the biggest tax reform that has taken place in independent India. A herculean task, encompassing officials and resources from multiple states and departments across the country; the advent of GST replaced a system of multiple indirect taxes borne by the consumer. The implementation of such a bold tax reform is truly commendable considering India’s socio-economic diversity exacerbated by the fact that it is a multi-party democracy.

It is time to take stock of the progress and envision a roadmap to make this GST a “Good and Simple” tax, if not a “God-Send” tax (if there ever was one)! It is essential to understand the diverse objectives and reforms that various stakeholders have in mind, as one stakeholder’s vision of a “Good and Simple” tax may differ from that of another.

Economist view of GST

An ideal indirect tax should be simple to understand and administer, garnering enough revenue for the exchequer and fulfilling other economic objectives. There are multiple taxation rates under GST, seemingly fixed to make the taxation structure progressive. Non-essential or luxury goods are taxed at a higher rate than essentials but determining which ones would fall under this category may be fraught with biases.

Besides, a system with multiple tax rates can be complicated and prone to both disputes and leakages. It may be necessary to reduce the number of tax rates to a maximum of three. Certain key sectors like electricity, petroleum, real estate and alcohol are kept outside the GST regime. This causes distortions in the economy, with inefficiencies and indirect costs. The GST regime must embrace all sectors and goods within its fold.

Another peculiar feature has been the levy of tax under three different names: Central, State, and Integrated. These three must ideally be combined into one to reduce ancillary problems. A long-term plan for unifying the dual administrative mechanisms (Centre and State) will also reduce the need for multiple registrations and tax filings. A major objective of the GST regime was creating a formalised economy. The most visible feature of this is reduced dependency on the use of cash. With the implementation of the e-way bill system, all high-value transactions across States are within the radar of the taxation authorities.

Multiple tax rates can lead to disputes as the taxman may require businesses to classify goods under various categories. This could attract higher tax rates for business entities, something that can be avoided by reducing the number of rates. Also, in the absence of one nodal, centrally-administered authority, a business entity must approach the Advance Ruling Authority for clarity on taxation law. This authority currently operates at the state-level resulting in different interpretations for the same transaction, simply compounding costs and confusion.

Compliance requirements cannot be bottlenecks to the normal flow of commerce. The earlier indirect tax systems required registrations in multiple states with separate compliances in each. However, the present GST with the e-way bill system is a significant improvement. The tax assessment processes need to be unified across States and a business ought to face one taxman across the country. Further, interstate transportation of goods within the same business involves the recipient paying GST and availing input tax credit. This leads to temporary pressure on working capital and runs counter to the smooth flow of commerce. Movement of goods and services between States within the same business is an unavoidable aspect of modern day commerce. Having implemented the e-way bill system across States to track the movement of goods, it is time that this feature is done away with.

The rules governing input tax credit must be simplified and made more trade-friendly. Certain business entities accumulate input tax credit which they cannot utilise fully. Others may be under the same management but operate as separate legal entities. However, the taxation regime fails to accept a “business group” as one taxable entity, resulting in taxes on inter-state transactions.

A “Good and Simple” value-added tax harmonises the return filing dates for business entities so that the flow of credit coincides with that of goods and services. The value added tax system is a good example of how this can work effectively. To put it simply, the rules are complex and require simplification. We can conclude that trimming the number of tax rates; unification of compliance requirements across States; more effective use of e-way bill system; more robust dispute prevention mechanism; and implementation of quick refund process is the common points that these diverse visions converge on. The GST Council has already initiated steps on many of these fronts. A secret weapon to eliminate several such issues may already be in the hands of the GST Council.

Role of GSPs

The Goods and Services Tax Network (GSTN) was vested with the responsibility of managing the GST database. GST Suvidha Providers (GSPs) are the interface between businesses and GSTN for flow of information leading to compliance. It was envisaged as a public-private partnership where the Suvidha provider could take up all associated tasks to enable a hassle-free compliance experience for the taxpayer.

Through their Application Service Provider platforms, GSPs have been assisting the taxpayer with uploading sales returns, reconciling inward supplies information, complying with e-way bill requirements, and filing of returns. GSPs will continue to be essential as the interface for sending voluminous information and reconciliation between the software deployed by the taxpayer and GSTN. In short, GSPs would continue to hold the fort as an extension of GSTN.

Business entities operating in multiple States are required to register in each State, login and file returns separately in each State. Till now, GSP was considered as an extension of GSTN, but it may be time for the GST Council to view GSPs as an extension of the taxpayer and indeed, a handmaiden of the taxpayer as well.

Business entities having operations in more than two States must be legally required to perform compliance under GST through a GSP. GSPs can be visualised to serve as a conduit between the State governments and the taxpayer to reduce the compliance burden for the taxpayer.

The e-way bill system can be a seepage proof umbrella over the economy to ensure that the economy is formalised. For this purpose, all the exclusions and exemptions from the e-way bill system are kept to the bare minimum. Business entities beyond a certain threshold must integrate their software with the e-way bill system through an interface of GSP. GSPs can serve as a catalyst for a further formalisation of the economy.

Apart from the above roles, the Central Board of Indirect Taxes and GST council can take a hard look at GSPs not merely through the conventional prism of
being an extension of GSTN but as a messenger, a linesman, and perhaps, an enforcer in part. GSPs are certainly a partner in GST reform and thus the nation’s progress.

(The writer is CFO of WeP Digital Services Limited)