The Goods and Services Tax (GST) is still far from perfect, despite some major tweaking last week. But what is heartening is how responsive both the states and the Centre have been to the grievances of assessees. The deliberations at last Friday’s GST Council, in particular, reveal how states have set aside their differences to address the problems businesses, especially small firms, are facing as they try to migrate to new indirect tax regime. If the 30-odd finance ministers can continue to pull together in such remarkable fashion, the GST should soon become far less intimidating than it was in July. There is less resistance to lowering taxes on various items, even if the multiplicity of rates continues to be a pain point. Critically, the Council has realised it needs to help smaller businesses that are struggling to comply with the rules, especially those relating to returns.
While that is why the composition scheme cap was raised to Rs 1 crore from Rs 75 lakh—and it may soon include service sector firms as well—why not raise it to Rs 5 crore, say, given how SMEs contribute so little to taxes? So, while allowing firms with a turnover of less than `1.5 crore to file their returns once a quarter is welcome—as are the measures to help exporters—the Council needed to look at the larger picture of easing the compliance burden. Indeed, while the Council has kept the reverse charge mechanism in abeyance till April 1, this needs to be done away with completely—if bigger firms have to pay input taxes on purchases from unregistered firms, chances are they will stop buying from smaller firms as soon as they can.
Also, the agenda for the Guwahati meet on November10 -11 should include measures to make it easier to file returns. To be sure, it is important that invoices be matched to check evasion but the system must be a simple and user-friendly one. In other parts of the world, the taxman resorts to random sampling to conduct more detailed invoice-level checks to ensure there is no tax theft. While the government is keen to have invoice-level matching to check tax theft, if the number of tax slabs were lower and there weren’t so many possible areas of disputes over classification, the need for this would reduce considerably. Finance minister Arun Jaitley has repeatedly talked of lowering the number of tax slabs once tax collections stabilise but the GST Council would do well to start working on it sooner. The last thing the systems needs is hundreds of disputes of classification and needless litigation. However, there is a genuine danger of this unless there is greater clarity on classification and rates because once the GST returns are inspected, and the taxman raises demands, companies will contest them. In case the Council insists on invoice-level matching, one option is to follow the Chinese model, where the authorities ensure all taxpayers use the same taxman-provided software to generate invoices—and the moment an invoice is generated, all invoice-level details get uplinked to the taxman; this can be done in large cities to begin with, and its usage staggered for the rest of the country. Between filing a summary return, a sales return, checking/verifying the auto-populating input tax credits and then the final tax return, filing GST is not easy for even larger firms.