Ironing Out The GST’s Wrinkles
Albert Einstein often said the clever simplify the complex while the rest complicate the simple. The Goods and Services Tax (GST) was implemented one year ago amidst much fanfare at a midnight gathering of the country’s leaders in the central hall of parliament. The objective was to collapse multiple state and central taxes into one broad-based nationwide tax. The Goods and Services Tax would therefore subsume VAT, service tax, excise and CST. The idea was to simplify the complex.
Has GST lived up to its promise? The first year of such an overarching tax reform is bound to undergo teething problems, especially in a fractious democracy like India, where regional satraps fiercely guard their states’ tax revenue. The fact that the government was able to get all states and union territories on board was itself a significant achievement. But the hidden hand of the bureaucrat which determines the devils in the detail has complicated what should have been a clean, simple GST regime. Einstein would not have been pleased.
Most truckers though are a happy lot these days. Post-GST, their travel time across inter-state borders has fallen by over 25 per cent. Transporters are saving fuel. Drivers are saving money. Before GST was introduced, they would wait for hours at state check points. One driver said he once sat, ate and slept in his truck for 36 hours at a state border post. Now the checkpoints have gone. The need to bribe officials is over. But there is one niggle: flying squads of RTO inspectors who extract their pound of flesh. Overall though, GST has been a boon for the transport and logistics sector. As smaller towns assume greater importance in India’s economy, the sector will become a key driver of GDP growth.
At the checkposts
Not everyone is happy. E-way bills continue to demand complex documentation, slowing down transport time. E-way bills for goods over Rs 50,000 were introduced earlier this year to curtail tax evasion. They have succeeded to some extent in doing that but the price has been fresh delays at checkpoints. For small traders, even the task of generating an e-way bill can be onerous. Anil Bhardwaj, secretary-general of the Federation of Indian Micro and Small & Medium Enterprises, told a news magazine that small traders face new problems in creating e-way bills: “For instance, a lathe machine operator with his limited means and learning is now required to make an e-way bill through the Internet. For this, he needs a computer and someone to operate it. In effect, the cost of operation for micro industries has gone up. They don’t understand the new system. It’s difficult for them to employ someone for just this purpose. It eats into their thin profit margins. Sometimes the cost of hiring someone may be more than what the company earns.”
One year on, many of these wrinkles in GST need to be ironed out. The key issue is complex paperwork though the government has promised to shortly introduce a modular, single-page, user-friendly document for all GST transactions. Finance Secretary Hasmukh Adhia, who has midwifed the GST project, says: “There will always be initial glitches. All the glitches are now over and we are in a smooth phase of implementation.”
Multiple tax slabs
Several small traders aren’t as sanguine. Their complaints range from the multiplicity of tax slabs to complex documentation. Some of the problems are bureaucratic in nature. As the analyst T.N.C. Rajagopalan observed in Business Standard: “There are problems with the formulae for refund of unutilised input tax credit on account of zero rated export, tax on recoveries from employees such as for canteen food, double taxation on ocean freight, unrealistic conditions for rebate of taxes paid on export goods, unnecessary restrictions for grant of upfront exemption for import by exporters and so on. A recent problem is different interpretations by the Authority for Advance Ruling in various states.”
The GST Council will meet on July 21 to sort out some of these issues but placing petrol and diesel under GST is not on the cards. Adhia says the reduction in fuel prices under GST would be marginal. The government expects crude oil prices to soften following the decision by Saudi Arabia and Russia, the world’s two largest oil exporters, to increase production among OPEC members by between 7,00,000 and one million barrels a day.
United States President Donald Trump has been relentless in his criticism of high oil prices and wants to see them fall below $70 a barrel, a price both OPEC and America’s shale oil industry would be comfortable with.
New-economy priority
One new-economy sector that the government has been keen to promote by placing it under a relatively low GST slab of 12 per cent is electric vehicles (EVs).Finance Minister Piyush Goyal told me in a recent conversation that the government wants to push EVs rather than hybrids which he says is a 20-year-old technology. As a result, the GST slab on small hybrid cars has been fixed at 28 per cent and the rate for large hybrids at 43 per cent.
Dismissing criticism of the high GST slab on large hybrids, Goyal emphasises that EVs, not hybrids, are the future: “Hybrid is an old intermediate technology. It has been prevalent since the 1990s and has not really taken off since its inception. Electric vehicles are the future and will soon replace both conventional and hybrid vehicles. There is no rationale in incentivising an old, replaceable technology. With the GST slab of just 12 per cent, the EV industry has seen a rapid ramp-up with sales of EVs increasing more than four times over the past year. For faster adoption of electric vehicles in the country and for setting up a robust manufacturing base enabling job creation, the GST tax rate has been kept at a modest 12 per cent.”
However, early reports on the first batch of EVs delivered to the government by the Tatas and Mahindras have not been encouraging. During testing, they ran for less than 80 km on a single charge. The two companies are now revamping their EVs and calling upon the government to help set up a nationwide battery charging infrastructure to meet the Narendra Modi government’s ambitious target of an all-electric vehicle passenger vehicle sector by 2030.
MSME woes
Meanwhile, several sectors like real estate and MSMEs have been buffeted by GST. Rashesh Shah, President of FICCI, in a thoughtful article in The Times of India wrote: “To make the GST reform truly effective and to really make it ‘one country one tax’, both central and state governments must recognise the need of eventually bringing the excluded sectors like petroleum and real estate within the ambit of GST. The next step would be to consider converging the existing band of GST rates to three, in line with international standards. This will help to resolve interpretation issues regarding classification of goods and consequently reduce complexity and probability of disputes, eventually leading to simplification.”
Apart from the real estate sector, small textile units have also been severely affected by GST. Jobs have been lost. Slow refunds have hit cash flows. While transporting textiles to markets across states has cut logistics costs and time by up to 30 per cent, the entire GST process is seen by small-scale manufacturers – who form the spinal cord of Indian industry – as cumbersome. It affects efficiency and consumes productive time.
The Revenue
The revenue from GST has been another bone of contention. After hovering around Rs 90,000 crore a month, it is expected to average just over Rs 1 lakh crore a month in 2018-19. Even that would be disappointing. The government would by this measure collect around Rs 12 lakh crore in GST revenue annually. But with the bulk going to the states and some towards refunds, the Centre could end up with less than Rs 5 lakh crore a year. With service tax alone having generated nearly Rs 3 lakh crore in 2016-17, the one-nation, one-tax principle, subsuming service tax, excise duty and other levies, was expected to be significantly more buoyant.
One reason for the lack of buoyancy in GST revenue is pointed out by Kerala’s Finance Minister Thomas Isaac. In an interview with a news magazine, Isaac said: “We had big expectations of buoyant revenues, falling prices and improvement in ease of doing business, but none of this has really materialised. Revenues are not buoyant because there are terrible leakages. As the whole system is not in place today, even if you decide on the returns form, one doesn’t fully know if the annual returns will be enforced this year. There have been no gains to the consumer despite a very significant fall in the tax burden. Rarely have price come down. And the anti-profiteering mechanism to protect consumers has not been very effective.”
Tax evasion is an art and science in India. The Goods and Services Tax has to come to terms with that culture and plug leakages as the second year of GST’s rollout gets under way. The first wrinkle the GST Council at its next meeting must iron out is collapsing multiple tax slabs to three. Outgoing Chief Economic Advisor (CEA) Arvind Subramanian at a media event was emphatic about rate simplification: “I think the 28 per cent rate has to go. The cesses may have to remain, but there should be just one rate on cesses. Today, we have GST rates of zero, 3 per cent (for gold), 5 per cent, 12 per cent, 18 per cent and 28 per cent. We need to rationalise but at the first instance the 28 per cent rate should go.”
With Finance Minister Piyush Goyal displaying a pragmatic bent of mind, that reform seems entirely plausible. In the following pages, domain experts dwell on how GST has unfolded in its inaugural year and what further reforms it must undertake to fulfil its undeniable potential.
The writer is the biographer of Rajiv Gandhi and Aditya Birla and author of ‘The New Clash of Civilizations’. He writes a regular column for BW Businessworld
