Fine-tuning GST reforms to stimulate economic impulses

A case for rate rationalization

When GST was introduced in July 2017, multiple rates were introduced as part of indirect tax reforms in India, in line with revenue neutral rates for individual commodities and services. Accordingly, a structure of five rates viz. nil, 5%, 12%, 18% and 28% was created, depending on the type of goods and services and the rate structure in the prior regimes of Central Excise and VAT or Service tax. While some rationalization of rates has been done in the last five years by shifting goods and services from one rate bracket to another, a comprehensive rate rationalization, as part of GST reform in India, is now due to align the structure towards a two-rate format in the future.

Most VAT jurisdictions globally have single-rate structures. However, given India’s complex economy and diverse demand and supply, a single-rate structure would be highly inflationary. In the white paper submitted by the then Chief Economic Advisor, Arvind Subramanian (1) in December 2015, 15.5% was considered a revenue neutral rate. However, it was advised that the rate should be split in two, 12% and 18%, to avoid an inflationary impact. It is time the economy moves towards a two-rate structure, though the rates may be different. Currently, most inputs are at 5% and most finished products and services are at 18%. These two structures need to move in tandem to reach a rate structure that may not be inflationary and will also take care of the revenue needs of the states and the center. One way to keep these rates low and rational is to enhance the GST base to include articles like petroleum, real property, alcohol, and electricity within the tax net. 

Apart from rationalizing the overall rate structure and increasing the base, the rate layout for individual commodities needs to be re-evaluated to rectify any inverted duty structures. While some effort has been made in this area, such GST tax reforms are still work in progress.

E-invoicing for B2C transactions and centralized assessments

GST has been a pathbreaker with compliance now mandated digitally. This has not only put the entire transaction database online but has also substantially reduced the taxpayer’s interface with government authorities. With e-invoicing extended to most taxpayers for passing credits, the probability of fake invoicing has gone down and data matching to avail credits has become more efficient. The next stage of GST compliances would be to move the Business to Consumer (B2C) transactions to mandatory e-invoicing, which allows this data to be reported and help in reducing credit frauds.

While a lot has been achieved in digital compliance, there are still areas that need to move toward effecting full digital compliance.

GST collections have increased from around INR 90,000 crore per month in the first year to INR 140,000 crore per month in the current year. Revenues are reaching their optimal level and there has been a positive economic impact. This is a result of various factors at play. Intrinsic growth of the economy and inflation are two of these factors, but effective anti-evasion measures taken by the authorities have also played an important part in plugging revenue leakages through fake invoicing and other credit frauds. 

The flip side of these anti-evasion measures is that honest taxpayers with registrations across multiple states have had to undergo multiple audits or assessments across jurisdictions, resulting in a higher cost of tax compliance. Also, multiple interpretations lead to unnecessary litigation with a large amount of working capital getting stuck in these disputes. Therefore, like income tax and customs, it is time for GST in India to move to faceless assessments, which would be centralized for a given taxpayer. Centralized assessment might free up taxpayers’ resources for more productive use and give further impetus to the growing economy.

Filling the gaps in credit flow

As the GST Council looks at rate rationalization and digitalization, an area that needs a re-look is credits. The main principle of GST is not to have any cascading taxes, and that is achieved by having a seamless flow of credit. While the GST Council has imposed certain rates on goods and services where credits are not permitted, the GST law also outlines certain inputs and input services on which credit cannot be attained. For a truly seamless credit flow, there should ideally be no breaks in the credit chain as that leads to cascading and inflation in the cost of supply of goods and services. At present, taxpayers cannot avail credit for expenses like those related to employees, cabs, mobile phone towers, and many others, which are genuine business expenses and integral to providing supplies. These credits may can be reconsidered and permitted under GST tax reforms in India to reduce the cost of supplies.