Goods and Services Tax (GST)

Reforms needed in the next stage of GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Input tax credit

Mains level : Paper 3- Next stage of reforms in GST

Context

India has completed five years under the GST regime.

How GST has performed so far

  • Before the GST, there were multiplicity of the Centre and state levies that masked the actual incidence of tax on products, the debilitating effects of the entry tax and the uncertainty of tax rates.
  • Today, in contrast, we have a single tax across the country combined with a stability in rates and a common technology platform in the form of a GSTN.
  • Record number of registrants: The ease of payments has improved over time with the technical glitches having been slowly sorted out, leading to a record number of GST registrants – increasing from 1.08 crore in April 2018 to 1.36 crore in 2022.
  •  The revenue gains have been significant.
  • If we factor in the three-percentage point decline in the incidence of GST duty from 14.8 to 11.8 per cent as suggested by the RBI, the actual proportion in 2021-2022 would have been 7.4 per cent of the GDP (according to a recent article by Arvind Subramanian and Josh Felman).

What were the changes made to ensure the stricter compliance

  • The above improvement can be traced to stricter compliance flowing from three factors.
  • 1] Input credit only after supplier uploads invoice: Denial of input credit to the buyer without the supplier uploading the invoice.
  • 2] The introduction of e-invoicing.
  • 3] Third the introduction of e-waybills for transporters for value exceeding Rs 50,000 per consignment.
  • Greater coordination between CBIC and CBDT: Another factor is greater coordination between the Central Board of Excise and Customs (CBIC) and Central Board of Direct Taxes (CBDT) in compliance verification.

Changes needed

  • 1] Provisions for unregistered GST suppliers: The micro, small and medium enterprises (MSME) sector has been affected by the GST reforms because the large units have been reluctant to buy from them in the absence of input duty credit.
  • An important measure here would be to amend the law to provide that all units buying from unregistered GST suppliers would have to pay duty on a reverse charge basis.
  • 2] Rate rationalisation: While the revenue gains have come through better compliance, the next surge in GST revenues will have to come from an increase in the average incidence of GST duties.
  • This will require a combination of measures — phasing out of exemptions, raising of the merit rate from the present level of 5 per cent and merging the 12 per cent rate with the standard rate, whether to 16 per cent or 18 per cent.
  • 3] Inclusion of fuels and real estate: Including natural gas/ATF under GST should be considered.
  • Further reforms in the factor markets — land, real estate and energy — would require their inclusion in the GST.
  • This is essential because while the economic reforms of the 1990s restructured the product market, the factor market reforms were incomplete.
  • 4] Creation of federal institution: We need to create another institution in the form of a GST state secretariat that can bring together senior officers from the Centre and states in an institutional forum registered under the Society Act.
  • This forum could also provide a common point of contact for trade and industry to redress the grievances on non-policy matters.

Conclusion

As GST enters its sixth year journey, the changes suggested above will fine tune it to propel India towards $5 trillion economy.

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Back2Basics: GST Input Tax Credit

  • Input Tax Credit means claiming the credit of the GST paid on purchase of Goods and Services which are used for the furtherance of business.
  • The Mechanism of Input Tax Credit is the backbone of GST and is one of the most important reasons for the introduction of GST.
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