GST at 3 – A Giant Reform

Taxes are what we pay for a civilised society, including the chance to insure,” said Wendell Holmes Junior. Needless to add, the implementation of the Goods and Services Tax (GST) effective from July 1, 2017, is by far the most transformative indirect tax reform by Prime Minister Narendra Modi’s government, in post-independent India’s history. GST, which is based on the premise of “One Nation One Tax”, makes India a unified, common market. It is a single, destination-based, multi-stage tax on the supply of goods and services, right from the manufacturing to the consumption stage. Credits of input taxes paid at each stage are available in the subsequent stage of value addition, which makes the GST, essentially a tax only on value addition at each stage. It is indeed the Input Tax Credit (ITC), besides a whole host of other progressive moves, which make the GST, as we know it in India, superior to any other consumption-based or Value Added Tax in any other country.

GST was implemented in France for the first time in 1954 with the standard rate largely being 20%. It came into being in New Zealand in 1986 at 10%, before moving to 15%, which applies to all purchases, but there is no GST on residential rents and financial services. GST was initiated in Singapore at 3% in 1994 and then went up to 7%. In Indonesia, imports are subject to both Value Added Tax (VAT) and GST, with the luxury tax on imports at between 10%-50%, but most exports are exempted from GST. In China, there are three indirect tax rates, zero, 5% and 19%, but with very few items that are ‘recoverable’ or that enjoy the benefit of an input tax credit. Introduced at an original rate of 7%, the GST rate in Canada, currently sits at a rate of 5%. In few provinces like Ontario and Nova Scotia, the GST is combined with provincial sales tax (PST) into a harmonised sales tax (HST) of between 13%-15%. The Canadian province of British Columbia discarded GST and went back to Provincial Sales Tax (PST), within just 2 years of living with GST. Provinces like Alberta and Yukon, have the GST but no provincial or territorial provincial tax rate.

What the aforesaid indirect taxation data pertaining to other countries highlights is the fact that there is no single kosher indirect tax and/or GST rate. There are over 40 different GST structures in 160 odd countries where it is applicable. Hence those who have been alleging that India’s GST is a multi-tier one and therefore inefficient, are absolutely ignorant. Global experience has shown that a multi-layered GST structure is pretty much par for the course. While Brazil has six tax slabs, even in a country like Canada, for example, which is a fraction of India’s size in terms of population, different provinces have different GST structures.

Indian variation of GST is unique due to the sheer array of numbers involving a country of 1.37 billion people and counting. For instance, there is this obnoxious attempt by naysayers to compare India with Singapore. Still, these critics conveniently forget that Singapore, with a population of just over 5.8 million, is less than half of Mumbai with a population of well over 19 million and growing. Also, Singapore witnessed skyrocketing inflation within a year to 8.4% after GST was implemented. In contrast, average retail inflation in India since July 2017 has been consistently below 4%, in most months, barring a few months when it breached that figure, in say, early 2020, for instance. Even in the months that the consumer price index (CPI) registered a reading of well over 4%, the core inflation was still always benign, between 3.7% and 4.1%. Hence Modi’s critics, who had predicted that GST would be inflationary for India, have been proven entirely wrong.

From a pre-GST tax rate of largely between 28%-31% and an entertainment tax rate of as high as 110%, post-Modi government’s pathbreaking GST, 1186 goods comprising 97.69% of the 1214 goods that are widely used, are now taxed at well below 18%. That has to be the most significant pro-middle class friendly move, ever, by any government in post-independent India.

If demonetisation has been a game-changer, by making digital India a reality, the GST is a transformational tax reform that will boost “Make in India” by bolstering India’s competitiveness, both locally, and in export markets. This, in turn, will have a salubrious impact on virtually every economic parameter. GST is largely pro-poor and pro-middle class, and this is amply evident from the fact that items of daily use, from milk, curd, eggs, fish, chicken and flour, to rotis, milk powder, tea, coffee, medicines, frozen vegetables, LPG, biogas, stents, kerosene and sanitary napkins are charged either at zero or a humble 5% tax rate. GST for all religious tours has been fixed at 5%. The GST for air travel in economy class is 5%, and GST for business class air travel is 12 %. GST for movie tickets costing up to Rs 100 was brought down from 18% to 12% and, for those priced above Rs 100, from 28% to 18%. GST for tyres, many auto parts and TVs up to 32 inches, was brought down from 28% to 18%. To cut to the chase, Modi’s version of GST has been progressive and middle class friendly, without being a burden on the exchequer and that is commendable, indeed.

No country with India’s geographical size, complexity or population, could have reined in inflation amidst a choppy global environment and still effectively executed GST. Still, the Modi government did that with panache and much more. In effect, of the 160 odd countries that have adopted GST, only 49 follow one tax slab module, 28 countries have two slab tax modules and all others have modified and tweaked the GST structure to align it to their country-specific needs, which essentially means there is no need to follow the “All size fits one”, approach.

The seamless GST implementation by the Modi government is a glowing tribute to what political conviction of courage can achieve. Under GST, Central Excise duty, Additional Excise duty, Service Tax and additional duty of customs (equivalent to excise), State VAT, entertainment tax, taxes on lotteries, betting and gambling, and entry tax (not levied by local bodies) have been subsumed within GST. Other taxes subsumed are Octroi, entry tax and luxury tax, thus making it a single indirect taxation system, in India. The GST structure is relatively simple with Integrated GST (IGST), which deals with the inter-state sale, has revenues being collected and shared by both states and the Centre. SGST and CGST dealing with intra-state sales have revenues being collected by the states in the case of SGST and Centre, in the case of CGST. Of course, there is the UTGST too, for the Union Territories.

An e-Way Bill which is an electronic permit for shipping goods similar to a waybill is now mandatory for inter-state transport of goods effective from April 1 2018, under the GST regime. It is required to be generated for every interstate movement of goods beyond 10 kilometres with the threshold limit being Rs. 50,000. It is a paperless technology solution and critical anti-evasion tool to check tax leakages. It helps in clamping down on trade that happens on a cash-basis, beyond a specific limit. Along with GST, the e-Way bill, with RFID tags for motor vehicles which are captured at toll plazas by sensors, have been gigantic steps in the right direction in improving tax compliance. All taxpayer services, such as registrations, returns, payments etc., are now available online., helping transparency.

Congress president Rahul Gandhi and his coterie of sycophants can keep vacillating between false bravado and sheer desperation at what they could have done with GST. But finally, an idea is only as good as its implementation. So while the Congress built flaky castles in the air by sitting on the Kelkar committee recommendations for almost ten long years, kudos to the Modi government, that it walked the talk and sorted out thorny issues and also made the necessary alterations, that eventually made GST a reality on July 1 2017.

It is no mean achievement that GST collections have seen an average run rate of well over Rs. 97,000 crores in 2018-19, versus a monthly average of Rs. 89,885 crore in the financial year 2017-18. In 2019-20, the average monthly run rate was a little over Rs 1 lakh crore. In the current fiscal year, due to COVID related lockdown, GST collections that had gone down to barely Rs 35000 crore in April, went up to a good Rs 90,917 crore in June 2020, indicating among other things, that green shoots are firmly taking shape.

Since its inception in 2017, many procedural changes in the last three years, have simplified GST. GSTR-9A filing for composition taxpayers has been waived off for FY 2017-18 and FY 2018-19.GSTR-9 is the annual return to be filed by every GST registered taxpayer irrespective of their turnover.GSTR-9 filing for businesses with turnover up to Rs 2 crore is now made optional for FY 2017-18 and businesses with an annual turnover of less than Rs 5 crore, filing of GSTR-9C for FY 2018-19 is waived off.GSTR-9C is the reconciliation statement to be submitted by those GST registered taxpayers to whom GST audit applies. GST Audit applies to those taxpayers whose turnover exceeds Rs. 2 crores. Audited financial statements must be filed by the taxpayers along with this after obtaining certification from the auditor or a Chartered Accountant or a CMA.

Due to the lockdown and COVID related challenges, as per announcements, for registered GST taxpayers with aggregated annual turnover less than Rs 5 crore, the last date for filing GSTR-3B due in March, April and May 2020 was extended. For such taxpayers, no interest, late fees, and penalty were to be charged. For those whose turnover is Rs 5 crore or more, delay in filing returns due in March, April and May 2020 would attract a reduced rate of interest at 9% per annum from the due date (earlier interest rate is 18% per annum). No late fees and penalty would be charged, if complied before or till June 30, 2020.

Statistics show that out of eligible large taxpayers for 2017-18, 91.3% had filed their annual return by February 12, 2020. Similarly, 92.3% of eligible large taxpayers had filed their reconciliation statement before the said date.

 

While annual return filing is optional for taxpayers having annual turnover up to Rs 2 crore, the same is mandatory for those having annual turnover above Rs 2 crore. Such taxpayers are also required to file reconciliation certificate known as GSTR-9C, which can be filed only after filing of GSTR-9. The data shows that the number of taxpayers with a turnover of more than Rs 2 crore is 12.42 lakh, which is only 13.4% of the total 92.58 lakh regular taxpayers. This additionally means 80.16 lakh taxpayers were not mandated to file annual returns!!

To further help businesses, the threshold for quarterly return-filing and monthly tax payments was raised in 2018, from an earlier limit of an annual turnover Rs. 1.5 crore to a yearly turnover of Rs. 5 crores. This move benefitted 93% of registered GST taxpayers as only 7% of businesses had to file monthly returns. To additionally ease matters, by June 30 2019, for the preceding financial year, only a consolidated GSTR-9 for regular, individual taxpayers would have to be filed by those already filing GSTR1 and GSTR-3B, subject to concessions above.

The best thing about the GST is that there are no hidden taxes and what you see is what you get. Efficiency gains, higher compliance, prevention of tax leakages, lower rates, wider base, export friendliness and tax neutrality, have brought down the overall tax burden for consumers and enhanced the ease of doing business, besides of course making India’s fuel economy more competitive by eliminating the need for truckers to wait endlessly to pay octroi and entry taxes at inter-state check-posts. A trucker on an average can now cover 325-350 km in a day, versus 200-225 km a day, in the pre-GST period, thanks to a lower number of halts at “toll nakas”.

To curb corruption, tax leakages and frauds using fake invoices, the Modi government is bringing in E-Invoicing, for those with more than 100 crore turnover, that proposes to put an end to the above vices by mandating authorisation of every invoice from the government portal. Besides plugging tax leakages, implementation of the E-Invoicing system, which will be voluntary initially, shall be beneficial for taxpayers as well.

Some of the key benefits for taxpayers are listed here in–One-time reporting of the invoicing details for all GST filings, minimised invoice mismatches during reconciliation, standard invoicing system implying interoperability between multiple software, real-time tracking of invoices prepared by the suppliers, automated return filing process as necessary details shall be auto-populated and of course, easy and precise ITC claims.

The extension of GST return filing timelines together with E-invoicing, would allow businesses to focus on resumption of business processes once normalcy resumes in the post COVID era. The waiver of interest, late fees and penalties for MSMEs during these COVID stricken times, would enable them to focus on reviving their businesses once things are back to normal. The people-friendly Modi government believes in hard numbers. Still, more importantly, it believes in providing the much needed hand-holding that small traders and businesses need while battling a global pandemic.

In the proposed E-invoicing system, the companies’ systems will be linked to the GSTN portal, wherein the generated invoices will be passed on to the GSTN portal within 24 hours.E-invoicing is in works in many countries including South Kore and other Latin American countries. As per the structure finalised by the government, an invoice will be reported to the Invoice Registration Portal (IRP) by the taxpayer, which will generate a unique Invoice reference number and digitally sign the e-invoice and sign a QR code. Eventually, it will also do away with the need of electronic way bill requirement for those companies that opt for the system.

Allegations of too many procedural hassles while filing GST returns, are a pack of lies by vicious agenda peddlers from leftist media circles and a disgruntled opposition. From about 495 forms that needed to be filed in the pre-GST era, that number in the post GST era is down to just a handful of 12 odd forms. GSTR-1 is a monthly GST return that contains details of all outward supplies. GSTR-2 is a purchase return with details of all inward supplies to be filed by every registered dealer/person. The number of entities filing monthly summary sales return GSTR-3B and paying GST is higher than those filing outward supply return GSTR-1, in which invoice-wise details have to be filed. The GSTR-3B is a consolidated summary return of inward and outward supplies that the Government of India has introduced as a way to relax the requirements for businesses that have recently transitioned to GST.

It is to the credit of Prime Minister Narendra Modi and his indefatigable vision that by putting in place an optimal tax slab structure, the GST experience in India has very deftly avoided the pitfalls of the famous “Laffer Curve”. The GST structure chooses to tax demerit goods at the highest rate to disincentivise “sin goods” while keeping tax rates for items of mass consumption at zero or 5%. The GST model, under the Modi government, strikes just the right balance between the tax base and tax rates, thereby preventing the tax structure from becoming regressive. Modinomics has trumped the traditional Laffer curve propagandists by shedding any iota of greed and facilitating an enabling environment that promotes lower rates and higher tax compliance.

In a significant move towards taxpayer facilitation, the government recently allowed the filing of nil GST monthly return through “Form GSTR-3B” via SMS, a move which will benefit about 22 lakh registered taxpayers. The 122nd Constitutional Amendment that made GST a reality has a provision for including petrol and diesel under the GST ambit at a convenient time, something that was missing in the bill drafted by scam-tainted former finance minister P Chidambaram, who is currently out on bail, on corruption charges involving money laundering and abuse of power.

The BJP-led Modi government is right in treading cautiously on bringing fuel taxes under GST, because fuel taxes account for almost 30-40% of the revenues for many states and it is only prudent for the revenue stream from GST to stabilise during these COVID stricken times, before biting the bullet on this one. Long term commitment to limiting the fiscal deficit to 3% of GDP, notwithstanding short term deviations necessitated by higher capital spending by the government, is another consideration, that rightfully prevents any hurried action on this front.

Congress-led United Progressive Alliance (UPA) neither had the political will power, nor the courage or competence and, sat on the Kelkar Committee recommendations for ten long years without being able to forge a consensus on even bare basics like the mechanism of compensation to states, or method of dispute resolution under GST. Thanks to Prime Minister Narendra Modi’s foresight and farsightedness, in just three years, GST has evolved into a progressive and robust mechanism, with the end-to-end filing by an average of anywhere between 70 lakh to 1.3 crore persons every month, with more than 500 crore monthly invoices being processed and, with a tax compliance ratio of well over 70%. Indian variation of GST, an ode to Modinomics, in more ways than one, is indeed, a “Good and Simple Tax”.