Goods and Services Tax (GST)

[op-ed snap] India’s Goods and Services Tax regime isn’t the disaster it is made out to be

Note4students

Mains Paper 3: Economy |Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basics aspects of FDI in e-commerce.

Mains level: The news-card analyses the issues of Indian e-commerce industry, in a brief manner.


Context

  • India’s earlier indirect tax regime was often said to be fraught with problems.
  • The task force set up by the 13th Finance Commissionconcluded that the system was “distortionary and inhibited voluntary compliance”.
  • It was to address such concerns that the Goods and Services Tax was envisaged.

Background

  • GST had long appeared inevitable; the only question was about the timing of its implementation.
  • The government was faced with the onerous task of subsuming 17 taxes under the GST.
  • Given the number of taxes to be collapsed into a single regime, across states and the Centre, it was widely expected that the transition would not be effortless, or seamless.
  • It would require a massive effort not only to garner consensus given India’s federal structure but also to reorient administrative and business practices.

Analysis

Complexity of the previous regime

  • The Value added Tax is one of the main levies subsumed under the GST. As now, a multi-state business then was required to register and comply with the processes for filing VAT in each of the states.
  • But the VAT regime was not entirely similar across states – time limit for filing returns, the rates of tax and penalties varied.
  • Thus, a business operating across states had to keep track of the differing filing requirements.
  • A business with diversified operations – producing goods and providing services – had to file separate returns for goods and services.
  • By doing away with this multiplicity, the GST regime has visibly improved the compliance process.

Concerns with GST

  • Today, a year and a half after it was rolled out, the GST is often criticised for its complex filing processes and uncertainty.
  • The GST is also criticised for being uncertain as it has been frequently changed.
  • However no tax system is bereft of some degree of uncertainty. Frequent alterations are expected since the GST replaced another system.

Government’s response to these concerns

  • Responding to the demands of the taxpayers, the government has eased some of the compliance requirements – refund process for a certain category of taxpayers, deadlines for filing and rectification of returns.
  • An iterative process of change is a feature of any nascent tax system. It is hoped that as the GST system matures these concerns will no longer remain.

Increasing compliance

  • The GST was also meant to encourage voluntary compliance.
  • By rationalising tax rates and simplifying the process, the new regime sought to bring in those outside the system.
  • It was expected that through a seamlessly integrated process of claiming input credits, matching detailed invoices and generating e-way bills, those in the supply chain would be persuaded to shift to the formal taxation system.
  • There is now evidence of new entrants to the system. In 2018, it was reported that in addition to the 66 lakh crore entities that migrated from the old system, the GST Network had recorded 58 lakh new registrations.
  • This despite the fact that the threshold for registering on the GST Network (Rs 20 lakh) is much higher than it was for the VAT regime (Rs 1 lakh to Rs 10 lakh).
  • However, some critics have pointed out that many entities registered on the GST Network do not actually file their returns.

Way Forward

  • Simplicity and ease of compliance are what taxpayers primarily demand from a taxation system.
  • For a system that encourages compliance, directly or through network effects, is expected to yield greater revenue in the long run as economic activity picks up for the units reporting minimal activity.
  • The GST will impose transition costs in the short term but will increase the number of taxpayers in the long run and boost tax revenue.
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