India is lagging far behind in tax to GDP ratio (10-11%) when compared with its developed counterparts which have nearly 3 times as much collection (33%+) with a much smaller population and a larger GDP per capita.
“The first step to getting anywhere is deciding you are no longer willing to stay where you are”, so when our Late Prime Minister Shri Vajpayee, mooted the idea of “One Nation One Tax” i.e GST in 2000, little did one realise that it would take 16 years with numerous Committees and deliberations cutting across political lines to finally get the legislation enacted in 2016. So here we are finally, with our own desi version of GST, to meander through the complexities of India, which is by far the most diverse economy to have ever implemented this levy.
Introduced soon after the demonetisation, GST has had all the symptoms of a pre-term law with an under-prepared tech-infrastructure to deferments on dates to an ambiguous law, you name it you had it. However, these problems were expected while implementing a levy replacing over 40 central and state taxes across 30+ states and union territories affecting 1.3 bn people. Over 1000 circulars, notifications, and amendments have been issued since inception, which has made it far from a “Good and Simple Tax”. Mr Rony Joseph, CFO of AVA Group (Medimix), states “The time for a one nation one tax was long overdue with a plethora of state indirect tax laws that were not harmonious taking the interests of our country as a whole”.
The Government and the GST council have since managed to stabilise the operational aspects of the legislation. Often, the pleasure of criticizing makes us blind to the finer aspects of life. The GST law has enabled plenty of optimistic possibilities, some of which are already beginning to bear fruit:
- 3.5 million new dealers registered in the first 6 months
- 12.3 million (June 20) registered dealers with more than 50% being fresh registrations
- Introduction of e-way bills and removal of state check posts have reduced transportation time by 20-25%
- Indirect tax to GDP ratio increased from 4.38% in 14-15 to 4.9% in 18-19
- Indirect tax to total tax ratio increased from 43.85% in 14-15 to 45.10% in 18-19
Rahoul Jain, Director, Capricorn Food Products India Ltd, states that “GST has been a boon for mid to large businesses and helped many sectors get organised. However, small entrepreneurs find the compliance a bit onerous and the exemption threshold needs a relook”. Centralization of data and large scale automation of various compliances including billing have opened up scope for data driven and efficient fiscal management including:
- Targeted sector reliefs and their monitoring
- Matching revenues across levies like GST, income tax, etc to check underreporting
- Eventually simplify compliance by tracking data across sources (billing, banking, etc)
- Fixing evasion, thanks to the correlation between multiple stakeholders to a transaction
- Use of data analytics for targeted enforcement initiatives
- E assessments and administration based on algorithms and eliminating human intervention
The GST law has had its share of fair and fierce criticism, for the right reasons as well. Taxpayers and professionals generally complain about:
- increased compliance burden, especially amongst small assessees and businesses
- ambiguous regulations
- increased cost of doing business
- administrative lag and inefficient tech infrastructure
- bureaucratic overreach
- quasi-judicial positions filled with Revenue officers (AAR)
The recent advance ruling verdicts of “Parota is not Roti” and “overseas merchant trade transactions are subject to GST” are classic cases for ambiguous interpretation possibly violating the spirit. Earlier, exporters were asked to deposit GST in advance and claim refund post export, and after much hue and cry, an alternative mechanism was found. Indian tax administration is not new to controversies and not that prior to GST, we had a perfect scenario on indirect tax administration with 40+ laws and 30+ states regulating them. To view it positively, at present, the issues in indirect tax administration, are central and that a corrective action taken has its impact throughout the country.
India is lagging far behind in tax to GDP ratio (10-11%) when compared with its developed counterparts which have nearly 3 times as much collection (33%+) with a much smaller population and a larger GDP per capita. However, with the base infrastructure and teething issues behind, GST is all set to aid India to reach its stated position in the economy over the mid-long term.
GST is by no means a perfect levy as yet, but it has also demonstrated, probably for the first time since independence, what cooperative federalism can achieve and how multiple parties with diverse ideologies can come together and work as a union for the larger cause of Bharat. The levy is here to stay, though there are strong opinions on its success so far, there is no denying that it’s evolving and that its benefits far outweigh the shortfalls. All things considered, GST is a great possibility, well-conceived, moderately implemented but poised for a promising future.
Divakar Vijayasarathy is the Founder and Managing Partner of DVS Advisors LLP. Views expressed are the author’s personal.