‘Reverse charge’ made GST more complex, hit SMEs, & did little to add to tax; DigitalPay would complicate GST
It is true that, with multiple rates of taxation, and even with multiple rates of cesses, the GST introduced on July 1 was nowhere near the ideal GST recommended by tax experts and economists. And, it did not help that there were huge glitches in the tax filings as a result of which both big and small taxpayers were unable to upload their documents—it is not clear if this was due to the faulty design of the system by the taxman or whether the software firm, Infosys, got it wrong—the finance secretary’s latest comments suggest Infosys did not do as good a job as expected. While a final view on who was to blame requires a more detailed and dispassionate exercise, this newspaper’s view has been that while multiple rates were unfortunate, these were unavoidable in a federal set up where so many states were involved in every tax rate and in deciding which commodities should be taxed at what rate. If this was not bad enough, powerful manufacturing states like Gujarat even pushed for a 1% compensation for CST-removal—and the prime minister was said to be backing this. Yet, this was, correctly, dismissed in the final GST structure.
And, when businesses, large and small, complained about the problems they were facing in the compliance required, several filing requirements were put off from time to time; several of these would have helped invoice-matching, and would therefore have checked tax-avoidance. But, the GST Council wisely decided that it was more important that business not be unduly disrupted. To be sure, GST has disrupted business, but a lot of this is behind us—no solution on exporters’ refunds, though, has been figured out as yet and this remains a big problem area. During this period, Infosys chairman Nandan Nilekani has come up with another solution to make the process simpler and some version of this is going to be implemented. Several applications, interestingly, have also been developed to detect tax avoidance—you can enter the GSTIN number and get a status of the GSTN filings made and, in some cases, this can be done by just photographing the bill—in a few months, once GSTN opens its database to invoice queries, you can even know if the tax you paid on that latte has been deposited.
As part of the attempt to make sure all states were on board—despite public protestations by a few state finance ministers, all GST Council decisions have been unanimous—the GST Council also set up smaller groups to do detailed analyses of complex issues. One such Group of Ministers (GoM) headed by Bihar deputy chief minister Sushil Modi, was asked to look into the ‘reverse charge mechanism’ (RCM) as well as give sops—a lower GST—for payments made digitally, through debit/credit cards, for instance. It has, rightly, rejected both for now. The RCM requires buyers to pay the GST on behalf of their suppliers if they are small—this, undoubtedly, betters compliance but, given that policing hundreds of suppliers is a chore, it would have resulted in large buyers preferring to deal with larger suppliers that pay GST instead of small ones who do not. Given that just 5-10% of taxpayers contribute 80-90% of collections, dropping the RCM is a good idea as the hit to SMEs would be large. Similarly, giving a lower GST rate for digital payments—and that too only up to a certain invoice value—would have further complicated an already complex tax system. If the government wants to incentivise digital payments, it is much better to give them direct rebates or cash-backs instead of cluttering the GST system.