GST regime’s fifth anniversary potentially could mark the end of the constitutional revenue guarantee granted to states. The guarantee assured a compounded annual growth rate of 14% of the state revenue that got subsumed within GST.
With this seminal eventuality looming in the background, an appraisal of the present status and assessment of the future reform agenda is warranted.The GST rate policy is still a work in progress. In 2017, chief economic advisor estimated that the Revenue Neutral Rate (RNR), the average GST rate to ensure that GST collected is equal to the central and state tax revenue subsumed within GST, should be 15.5-16.5%.
The RNR was not achieved on account of the subsequent rate reductions, concessions, and exemptions granted, in fact, recent estimates suggest that the average GST rate at less than 12% is 30% lower than the target. Policy reforms perhaps rightly focused on enhancing compliances to provide better revenue assurance. Policy action was therefore primarily focused on disincentivizing evasion and non-compliances.
The compliance framework has been substantially tightened. A taxpayer needs to report invoice-wise details. E-way bills — a framework mandating registration of every transport consignment above rS 50,000 and e-invoicing i.e., registration of B2B invoices have been implemented. Non-compliant taxpayers are now barred from issuing e-invoicing and e-way bills thereby effectively forcing them out of business unless relevant taxes are paid. Input tax credits are only available to customers where the vendors are compliant and have paid taxes.
The increased compliance has led to the large-scale formalisation of the economy that in turn has triggered record growth in direct tax and GST collections. One of the primary objectives for implementing the GST regime was mitigating cascading tax impact on the economy making Indian manufactured products or services internationally competitive — an aspect critical to the ‘Make in India’ initiative. However, petroleum products, power, and real estate still effectively remain outside the GST regime.
Consequently, suppliers of these products and services are not able to set off GST charged on procurements against their output taxes and consumers cannot set off the taxes charged on supplies of these goods or services. Further, there are several instances of arbitrary denial or deferral of the input tax credit. For example, recipients are denied set-off of GST paid on some of the employee-related costs or while GST is payable on advances received, set off GST so paid is only available as and when actual supplies are made.
These arbitrary restrictions are legacies of the erstwhile tax legislations when tax evasions and abuse were rampant. The benefits of the present tightened compliances should now also flow to taxpayers and the credit framework should be made seamless. Addressing revenue-related anxieties of the state and the Centre is a pre-requisite for embarking upon the next phase of reforms. Further tightening of the compliance framework will not produce any material revenue upside but in fact, will impact business sentiments. Patchy rate increases or amendments in tax rates are inadequate and there is no choice but to tweak the present rate bands. Such rate increases must be accompanied by reforms.
The author is Indirect Tax Leader, EY India. Views expressed are personal.