“The need of the hour is a comprehensive review of the GST architecture, addressing, in particular, the issues flagged by the CAG.” What are the limitations of GST as a tax? What other steps do you suggest to improve its efficiency? (15 Marks)

Mentors Comments:


The Goods and Services Tax is an indirect tax system which was rolled out in 2017 with the aim of ‘One Nation, one tax’. But the transition to this new indirect tax regime has been marred by implementation glitches. The compliance burden has not significantly eased, nor have revenue collections met expectations.

These and many more issues have been dealt with in great detail by the Comptroller and Auditor General of India (CAG) in its audit report on indirect taxes. This careful report warrants a comprehensive review of the country’s new indirect tax regime.

Issues highlighted by CAG Report

  • Shortfall in government revenues post the shift to GST: The report estimates that the Centre’s revenues from goods and services (excluding central excise on petroleum and tobacco) fell by 10 per cent in 2017-18, as compared to the revenue of taxes subsumed under GST in 2016-17. 
  • Compliance: It was hoped that over time, as the system stabilises, compliance levels would rise. But, as the audit finds out, there has been no improvement in filing of GSTR-3B returns.
  • High compliance costs because of the prevalence of multiple tax rates implies a need to classify inputs and outputs based on the applicable tax rate. Along with the need to apply the correct rate, firms are required to match invoices between their outputs and inputs to be eligible for full input tax credit, which increases compliance costs further.
  • Delayed refunds under the Goods and Services Tax (GST) continue to trouble the taxpayers as well as the government
  • Invoice-matching: which is essentially matching sales and purchases of buyers and sellers is still not operational, suggesting that the hope of an IT-based interface remains a distant dream. 
  • Vulnerabilities in the system:  It draws special attention to the system’s vulnerability to fraud by way of excess input tax credit claims—which are refunds of taxes already paid by input suppliers, GST being applicable only to the value-added by a business or service provider.
  • State compensation: The report has also flagged issues with regard to settlement of claims. It notes that the manner in which the government devolved Rs 67,998 crore under integrated GST to states was “against the provisions of the Constitution of India.”
  • It has highlighted the issues of transitional credit (the carry forward of credit from the old tax regime to GST) which could have impacted central GST collections.
  • The IT audit of the goods and services tax network (GSTN) also points towards several shortcomings, not only in the GST registration but also in the payment module. Inexplicably, even the CAG’s access to data, during its audit, was curtailed.

Other problems with GST

  • Deterioration in relations between the Centre and states: is seen as the GST Council for the first time voted on an issue of the taxation of lotteries, a departure from the consensual nature of decision-making.
  • Centre delaying compensation to states for their revenue loss. Under the GST regime, states have to compensated if their revenue growth falls below 14 per cent each year over the 2015-16 base year. While the practice so far had been to transfer the compensation amount after two months, the Centre delayed payments for August and September, much to the states’ consternation. 
  • With the Centre’s own revenues likely to fall short of its budgeted target, tax devolution to states will also be lower this year. This will impact their spending. Sensing this, some state governments have asked for relaxing the fiscal deficit limit to 4 per cent. 

What does the report call for?

  • The CAG noted that without auto-generation of refunds, the envisaged GST tax compliance system is non-functional.
  • Invoice-matching is a critical requirement that would yield the full benefits of this major tax reform.
  • Also, applying analytical tools and artificial intelligence to the massive data that crores of invoices generate could help trace cases of evasion, among others.

Other reforms needed in GST

  • The first target should be to move to at least a three-rate structure, a lower rate for essential goods, a relatively high rate for luxury goods, and a standard rate for the majority of goods and services.
  • Simplifying the tax returns process.
  • Invoice matching is a critical requirement that would yield the full benefits of this major tax reform. It would protect the tax revenues of both the Centre and states and lead to the proper settlement of IGST. It would minimise, if not eliminate, the tax official-assessee interface.
  • Many goods are still outside the GST net, which comes in the way of seamless flow of input tax credit. Key items outside its ambit are electricity, alcohol, petroleum goods and real estate. This aspect needs to be looked into.
  • Emulating the best practices. The GST in New Zealand, widely regarded as the most efficient in the world, has a single standard rate of 12.5 per cent across all industry groups.
  • Part of the problem can be traced to the lack of coordination between stakeholders. There was also a failure to test the systems before rolling them out. These system-related issues need to be addressed quickly. As the report points out, there are “serious systemic deficiencies that need to be addressed”.
Newest Most Voted
Inline Feedbacks
View all comments
Dipanshu Sharma
Dipanshu Sharma
2 years ago