The seventieth year of India’s independence will go down in Indian history as the year the country switched over to one of its most ambitious tax regimes, Goods and Services Tax (GST). After several rounds of deadlock in the Parliament, GST was finally rolled out on July 1, 2017, replacing a thicket of indirect central and state levies that have been blamed for tarnishing India’s tax-friendly image.
GST got a thumbs up from nearly all sectors of the economy, barring few exceptions, and helped India reach a pedestal on the world stage for its ‘ease of doing business’ initiatives. Considering the scale of GST, it may be premature to pass a verdict on whether the ‘one nation one tax’ philosophy has lived up to the expectations or not.
However, with GST touching the one-year mark, it would be interesting to recapitulate key challenges which rocked boardrooms, government initiatives to address the issues, possible solutions, and what lies ahead for GST as it enters its second year.
One of the key challenges faced by dealers during the first year was adoption of new compliances such as obtaining GST registration in each state of operation. This proved to be particularly challenging for service providers who thus far were availing the benefit of centralised registration.
Further, the law prescribes filing of three returns per month and an annual return (currently reduced to two monthly returns). In addition, there are other returns for input service distributor, job-work, which further add to the compliance burden. The number of returns to be filed for service providers increased from two half-yearly returns to around twenty five in a year. Another complexity that arose was on account of the matching concept introduced under GST. Taxpayers are required to upload invoice level data on the portal and subsequently, match the same with the input data for availing credits. During the initial months, the GST portal was not able to support regular compliance tasks, let alone the matching mechanism. Considering the technical glitches, the government extended the return deadlines, introduced summary returns and kept the matching concept in abeyance.
The government further plans to simplify the return filing process by the end of 2018, by creating a hybrid model comprising features of both summary return and matching concept. It is expected to augur well for the industry, if the government releases the formats in advance for the dealers to get accustomed to and implements the same after adequate sand-box testing of the portal. Also, it is pertinent to note that while a simplified new return process is good news, it would necessitate changes in the ERP systems for alignment with the new return process.
E-way bill implementation
Challenges were also encountered in the implementation of e-way bill system across India. The portal for the e-way bill system crashed on the launch date – February 1, 2018 -on account of over-load, bringing the business transport system to a standstill.
Thankfully, following this episode, the GST council staggered the rollout of e-way bills, wherein inter-state e-waybills would be implemented first followed by intra-state e-waybills. Fortunately, the second innings of e-way bill system implementation was successful, replacing the earlier state-wise way bills implementation model.
Frequent changes in rates
Another problem encountered during the implementation of one of India’s biggest tax reforms was high GST rates, which were subsequently changed.
GST rates in India have been touted to be one of the highest compared to other developing countries. A multi-rate GST with four to five different slabs is an uncommon sight in the world tax map.
The complexity on account of multiple rate structure, lower threshold for composition dealers and classification of commonly used goods under higher rate slabs caused furor amongst the business community.
On the industry’s behest, on November 15 2017, the government rationalised GST rates on several commonly used items such as furniture, shampoos and select electronic items. Furthermore, the government increased the threshold limit under the composition scheme for individuals to Rs 15 million as opposed to previously stipulated threshold of Rs 7.5 million.
While reduction in GST rates was good for the industry as a whole, it came with its own set of challenges, revolving around the ERP system such as changing of the rate masters, updating of product masters on real-time basis, revision of pricing policy and, discount schemes, affixing of new labels, issuing of communications to customers and distributors.
As GST moves into its second year, it is expected that tax rates would further be rationalised with an intent to unify them in a phased manner, thus bringing in opportunity for businesses to become more competitive globally.
Like any evolving reform, implementation of GST also brought with it various ambiguities and equivocal provisions. Though the intention of GST was to have a simplified tax regime, issues like double taxation (for example, goods deposited in customs bonded warehouse), misplaced/omitted transitional provisions, credit blockages, uncertainty on reversal of credit, added a layer of complexity surrounding GST.
Credit must again be given to the government for addressing queries of taxpayers by regularly issuing circulars and frequently asked questions on various topics.
It is for this reason that complex provisions like reverse charge on purchases from unregistered vendors, tax on advances on goods, tax deduction at source were deferred within the first six months of implementation.
One of the most talked about provisions in the GST law is the anti-profiteering provision. The provision mandates reduction in tax rate on the supply of goods and services or the benefit of input tax credit to be passed on to customers by a corresponding reduction in output prices.
Though such provisions have been introduced with an intention to check any profiteering, it is difficult for businesses to implement complex pricing decisions immediately after a rate cut/ increase in credit. Moreover, lack of clear mechanism for calculation of such benefit has caused uneasiness amongst the industry. Amidst such confusion, taxpayers, especially wholesalers and retailers have been issued notices to check whether they have passed on the benefits to end customers or not.
In GST 2.0, the industry looks forward for the release of clear rules and guidelines on anti-profiteering with an insight into the documentation and periodicity of this exercise for due compliance. This is likely to clear the air surrounding the government’s intention of introducing such a provision.
Working capital blockage
Another interesting recap is the concept of zero rating introduced under GST. Exports of goods/ services outside India along with supplies made to Special Economic Zones (SEZs) have been termed as zero-rated supplies under GST. Initially, it was provided that no tax shall be charged on such transactions, provided the supplier obtains a bond/Letter of Undertaking (LUT) as applicable.
These concepts confounded the business community, especially service exporters who had never seen such requirements in the erstwhile regime. Further, for the first two trimesters, absence of a smooth and functional refund mechanism slowed down the exports nationwide. Given that exports directly impacts India’s standing at the world stage, the government came to the rescue of the exporters by relaxing LUT/bond requirements, and introducing offline a manual refund filing facility.As a result, the exports and the refund process has begun to pick up at a decent pace during the last few months. However, it is imperative for the government to have a more robust refund mechanism (and that too online) with clear instructions to state as well as central officers to process the refunds without any reluctance.
As can be seen from the above, though GST implementation witnessed mixed reactions in the last year, implementation of a reform of such grandiosity has truly been a historic event for all Indian taxpayers, government, and consumers. Despite the initial roadblocks, GST as a reform is likely to prove to be a catalyst in making India a hub for doing business across the globe. As a way forward, while the government is likely to focus on addressing the complexities in the law, businesses should actively plan to quickly adapt to the changes under GST. We hope the second innings of GST would be as successful and historic as its maiden year.