After nearly four years, GST is still a work in progress

In a few months, Goods and Services Tax law in India will celebrate its fourth birthday. This could be a good time to raise the question whether GST has been a success in India. Responses to this question normally swing between two extremes - the government and the tax department would say that GST has been an unqualified success while the taxpayer who has struggled to cope with the rapid changes in the law would say that GST has been a disaster.

As is normally the case with such extremities, the truth lies in the middle. GST has its good points and its poor points, with the latter winning over the former. Had the implementation been more smooth, the poor points would have been overshadowed by the good parts of GST.

The 15th Finance Commission has had an opportunity to make what appears to be a dispassionate assessment of GST. In their recent report, they have discussed most of the pain points ailing GST law today and have also suggested solutions that appear to be practical. The Commission has highlighted some challenges with the implementation of the GST including: a) large shortfall in collections as compared to original forecast; b) high volatility in collections; c) accumulation of large integrated GST credit; d) glitches in invoice and input tax matching, and e) delay in refunds.

The Commission observed that the continuing dependence of states on compensation from the Central government (21 states out of 29 states in 2018-19) for making up for the shortfall in revenue is a concern. It suggested that the structural implications of GST for low consumption states need to be considered.

The Commission has suggested that the 12% and 18% slabs under the GST be merged into one standard rate, and GST be rationalised to a three-rate structure, complemented by the 5% merit rate and 28-30% de-merit rate. On behalf of the 15th Finance Commission, the International Monetary Fund assessed and found out that the effective tax rate under GST stands at 11.8%. This is close to RBI’s estimate of 11.6%.

This rate is considerably lower than 14%, the average revenue neutral rate (RNR) that was required for smooth transition from the value-added tax regime without any revenue loss. GST’s true potential is to generate revenue at 7.1% of GDP, while at present it generates revenue at 5.1% of GDP. The revenue gap thus stands at a massive 2% of GDP, noted the Commission report. At the current levels, this roughly translates into Rs 4 trillion worth of revenue loss. To put the gravity of this figure in perspective, the Centre has budgeted that Central GST (CGST) will fetch it Rs 4.31 trillion this financial year.

Importantly, the Commission found inconsistencies in the data available from GST returns (from GSTN) and the national accounts (by the National Statistical Office). The value of outward supplies from GSTR-3B returns (monthly summary input-output) stood at Rs 652 trillion in FY19 as against total value of output in the economy, which was Rs 348 trillion.

It was of the opinion that if taxable outward supplies as per the GSTR -3B are to hold good, then the effective GST rate turns out to be 6.1% which is much lower than the effective rate derived from GSTR-1 returns. Also, there is no validation within the system to establish consistency between taxable value and tax paid as per GSTR 3B. The report underlined the negative externalities of slow economic growth on GST, especially with respect to the contentious issue of GST compensation.

GDP growth

The report also stated that with inflation being contained under the inflation targeting regime and some sluggishness in the economy, the nominal GDP growth itself is lower than expected. Hence, the protected revenue at an annualised rate of 14% places a substantial burden on the GST system.

It highlighted that about 70% of gross GST revenue goes to the states due to sharing and devolution. With many taxes subsumed under it, GST accounts for 35% of the gross tax revenue of the Union and around 44% of own tax revenue of states. It suggested that the inverted duty structure needs a change as it might be the reason behind the high share of tax liability being paid using input tax credit.

Over the last year or so, two developments in GST should be considered to be huge positives. The concept of e-invoicing has been introduced in stages – this is a step that would ensure greater transparency in supplier-receiver transactions which results in proper availment and utilisation of input tax credit. Simultaneously, the government appears to have announced a war to fight the menace of fake invoicing which was taking away a substantial portion of GST revenues.

However, imposing a monetary limit on availing input tax credit through Rule 36(4) and mandating that a certain percentage of GST has to be paid in cash are glaring negatives which should be done away with at the earliest. The announcement that a GST reconciliation statement need not be certified by an auditor could have probably waited for a couple of years more since the department would need some authentic database on what components of the revenue statement would attract GST – a task best left to the auditor of the entity.

Apart from the report of the CAG, the report of the Finance Commission is probably the only one that has made a deep-dive into GST rates and administration and made useful suggestions. It is hoped that at least some of these recommendations would be implemented by the government in due course of time. Meetings of the GST Council are not as frequent as they were earlier - this leaves an impression that the government has decided that they have done all they could on GST. Unfortunately, the reality is that GST is still a work-in-progress and is expected to remain as such for some more time.

(The writer is a Bengaluru-based tax expert)