In the light of recent findings of CAG, highlight the shortcomings in the Goods and Services Tax (GST). How can the government strengthen the weak links of the reformed system of taxation in India? Discuss (250 words)

Mentors Comments:
The answer should evaluate the lacunae present and what are the problems in the implementation and what can be done to overcome these concerns and challenges.
After intro, discuss about GST, its mandate and trace its coming till date.
Explain the lacunae being faced in implementation of the reforms.
Discuss that the major issues outlined by the CAG report is the lack of a system to match the invoices of buyers and sellers that would have closed interstitial spaces for tax evasion. The idea was to structure the system in such a way that there was no gap between two ends of a reported transaction.
Write a note on the findings of CAG and explain how these findings can be put to use to address the gaps in implementation of the reforms.
Conclude with way forward.

The Goods and Services Tax is an indirect tax system which was rolled out in 2017 with the aim of ‘One Nation, one tax’. The Comptroller and Auditor General of India (CAG) has pointed out lacunae in the GST regime, saying that system-validated input tax credit through invoice matching is not in place and a non-intrusive e-tax system still remains elusive after two years of its roll out.

Shortcomings of GST regime:
Difficulty in tax administration: Goes against the canons of taxation. A modern tax system should be fair, uncomplicated, transparent and easy to administer. It must yield revenues sufficient to cover the cost of government services and public goods.
Complicated taxation structure: A World Bank study published in May 2018 said that the Indian GST rate was the second highest among the 115 countries with a national value-added tax. It was also the most complicated, with five main tax rates, several exemptions, a cess and a special rate for gold. The multilateral lender said that only five countries had four or more non-zero tax rates—India, Italy, Pakistan, Luxembourg and Ghana.
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.
Inconsistencies in the Data: The lack of a system to match the invoices of buyers and sellers that would have closed interstitial spaces for tax evasion. The idea was to structure the system in such a way that there was no gap between two ends of a reported transaction. This way, neither party could under-report its value without detection, making it difficult for payments to be kept hidden.
Shortfall in government revenues post the shift to GST: It 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.
High compliance costs: are also arising because 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.
Instability in tax regime: The GST rates for various goods and services have been shifted from one slab rate to another over the past 1.5 years. The federal demands from states during GST Council Meetings to assuage their fears are the main cause. Multiple rates create problems of classification, inverted duty structure and large-scale lobbying.
Estimation overshot: GST collections have not met with the monthly revenue and growth targets which validates the need for keeping certain goods in higher tax bracket
Tax-Sharing issues: alleged deviation in the way GST revenue is shared with states. To determine how integrated GST is to be split up, the report notes, the government has followed a formula prescribed by the Finance Commission, though it should have gone by the Constitution and Integrated GST Act.
There has been lack of coordination between the Department of Revenue, the Central Board of Indirect Taxes and Customs and the GST Network

Way Forward:
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.
The next step would be simplifying the tax returns process.
The scope for lowering the GST rate is umbilically linked to direct tax reform.
A better way to make a tax system more just is by lowering regressive indirect tax rates while widening the base for progressive direct taxes on income and corporate profits.
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 need 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 percent across all industry groups.

The problems of the complicated GST with multiple rate structure and high compliance costs are now evident. To maximize the potential of GST, the government needs to examine its flaws closely.

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