Goods and Services Tax (GST): The Concept, Issues and Challenges
Indian Constitutional scheme of federal provincial relations makes a demarcation of taxing powers of the federal and provincial governments. As per original the Indian Scheme of federal-fiscal relations, direct taxes are mainly levied by the Union whereas Indirect taxes were levied by the Union and the States separately and accordingly, in consequence of legislative competence, States had enacted their indirect tax laws. But this constitutional scheme pertaining to Indirect taxes had led to division of the economy into different markets owing to the fact that rates of tax, commodities amenable to taxation, exempted commodities, threshold limit of taxation, abatement rules etc. were different in different states and there was hardly any co-ordination between States.
Indirect Tax Laws
In pursuance of the constitutional scheme and legislative competence, Union government had enacted various indirect tax laws, including but not limited to,
Central Excise Act, 1944
Central Excise Tariff Act, 1985
Additional Duties of Excise (Goods of Special Importance) Act, 1957
Additional Duties of Excise (Textile and Textile Article) Act, 1978
Customs Act, 1962
Customs Tariff Act, 1975
Central Sales Tax Act, 1956
Similarly, in view of the legislative competence under the Constitutions, States had also enacted various indirect tax laws and had levied varied indirect taxes, including but not limited to,
Sales Tax/ Value Added Tax
Taxes on Lottery, Betting and Gambling
Not only this, the imposition of entry taxes created another obstacle in free flow of goods throughout the territory of India. In addition, services were dealt with by the Union and there were evident problems regarding Works contracts where the goods and services were intermingled leading to complex tax structure.
In this backdrop, Constitution (One Hundred and First Amendment) Act, 2016 was enacted paving the way for imposition of Goods and Service Tax which was levied from 01st July 2017 to deal with the above issue, among others.
Goods and Service Tax (GST) is a single multi-stage tax on the supply of goods and services, right from the manufacturer to the consumer which is levied on VAT principle i.e. on Value addition. Credits of input taxes paid at each stage are available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.[i]
GST is an indirect tax levied on sale and consumption of goods and supply of services. Proposed levy of GST in India is not only a landmark tax reform but will also spur reordering of centre-state relation in general and centre-state financial relations in particular. GST has been levied in more than 160 countries across the world and there have been demands from the domestic entrepreneurs and Multi National Companies for indirect tax reforms in India in line with GST.
GST has been levied with the objective
to have one nation one tax;
to bring in uniformity;
to reduce tax concoctions;
to eliminate tax barriers;
to eliminate cascading effect;
to reduce compliance costs;
to subsume various indirect taxes in one tax etc.
India has opted for Dual GST i.e. concurrent levy of Central GST (Central Goods and Service Tax) and State GST on intra-state transactions. In addition, on Inter-state transactions, Integrated Goods and Service Tax (IGST) has been levied. The present GST, however, is partial GST only because certain commodities havebeen kept out of GST Net for the time being and are still being dealt with under old laws like Petroleum Products i.e. Petroleum Crude, High Speed Diesel, Motor Spirit (Petrol), Natural Gas, Aviation Turbine Fuel, Tobacco and Tobacco Products, Alcoholic Liquor for human consumption.
GST is a much needed tax reform and its successful implementation would yield benefits to the Government in the form of increased revenues, benefits to the consumers in the form of reduction in prices, to entrepreneurs in the form of elimination of tax barriers, reduction in compliance costs due to subsuming of various taxes in one tax and in overall development of the economy. However, all these benefits are dependant upon the successful implementation of GST.
Some Issues and Challenges regarding GST
It is true that the implementation of every scheme would suffer from and be subject to some teething problems and the same is true regarding GST as well. However, even after more than three months of its implementation, some core issues affecting the entrepreneurs, consumer, industry, the government and the economy as a whole, which have come up which could have been avoided.
There are adverse impacts of GST on small traders like increase in compliance cost regarding computers, software, professional fee etc. This apart, the provision of Reverse Charge Mechanism operates harshly against them since a medium or large enterprise would not like to purchase from an unregistered person or from a registered person opting for composition scheme. Though GST Council in its 22nd Meeting on 06th October 2017 has suspended operation of RCM till 31st March 2018 but much damage has already been done.
GST has been implemented in haste. The Constitutional (Amendment)Act was assented to by the President on 08th September 2016; CGST Act and IGST Act received the assent of the President on 12th April 2017. Some State GST laws have been passed in the month of June 2017 only. So far as CGST rules are concerned, they were notified only in June 2017. The actual compliance of GST law is to be done and ensured by the business community and under the new regime, their invoicing, accounts etc. required a sea change. This required a lot of time to be given for preparedness and implementation. However, there was very little time between the enactment of law and rules and the actual implementation. As a matter of fact, new regime requires computer resources, invoicing etc. to be done through computers and therefore, business community had to get their Accounting and Invoicing Software GST ready. Many small entrepreneurs which constitute the majority in India are using local or state level Software and they had to face tremendous issues in getting their software ready before the date of implementation i.e. before 01st July 2017. However, in many cases, software were not ready even after two months of the implementation of the Act since these software are required to be customized in accordance with the needs of each entrepreneur and the customization of large number of clients by these local service providers was a tedious task creating complications and chaos for the small traders.
Furthermore, the business community was required to be given adequate training regarding GST and hardly any worthwhile effort was made in this regard. The training was more focussed on training of Tax officer, Advocates and Chartered Accountants. The advertisements and FAQs released by the government lack legal backing.
This apart, the success of GST was dependent upon GST Network and the way the Network has failed in the past one month has really created a headache for the Government and the business community. Since the success is totally dependent upon technology, its failure has left everyone high and dry. The traders were unable to upload their returns and other details. Perhaps, hasty implementation did not give enough time for the development and testing of GSTN to be ready for large number of taxpayers and the lame excuses by the government that the Network has failed because most business-men were logging in on the last dates leading to crowding, does no good for the success of the tax reform.
This apart, the tardy implementation has created liquidity crunch for exporters. Under the old regime, tax on goods in the course of exports was zero rated and also the penultimate sale of goods which were meant for the purposes of exports. Accordingly, the actual exporter of goods would not have to pay taxes on inputs and his outputs were zero rated whereas in the regime, the exports have to pay taxes on input purchases and to claim refund of the same because exports are zero rated under the new regime as well. However, now the exporters have to first pay the tax and then claim refund. Since the refunds have not been processed for more than three months and the process of refund is due to start only in October 2017, it has led to blocking of capital of small exporters in the form of refund claim from the government leading to liquidity crunch. The GST Council has now declared that the refunds will be issued from October 2017 and has declared a scheme of e-wallets for exporters but as said earlier, the chaos could have been avoided at the outset.
Filing of returns by traders, small businessmen was a tedious task and they became had to shell out more money in the form of fee to professionals like Chartered Accountants and Advocates. Further, the returns were complicated and required sufficient training which was hardly provided to the business community. The decisions of the GST Council in October 2017 to make returns Quarterly from monthly is a retrograde step and it would, therefore, cover the vast majority of business community who will now be filing quarterly returns instead of monthly returns. It would also delay the refund process because there has to matching of Input Tax Credit which requires filing of returns. Delayed filing will lead to delayed matching and delayed refunds. Moreover, if the returns were to be made quarterly only, they should have been made at the outset i.e. right from the date of implementation of GST.
The above hassles could have been avoided, had sufficient time for preparation, training, development of software etc. been provided. The proper recourse would have been that after the GST Council’s recommendations, there should have been wide-scale consultations with the stakeholders and there should have been a sufficient period between the date of enactment and date of implementation as was done in case of General Anti Avoidance Rule (GAAR).
[i] Press Information Bureau, Ministry of Finance, Government of India, 03rd August 2016.
By Dr. Manoj Kumar Sharma, Assistant Professor of Law, RGNUL