Goods and Services Tax (GST) was implemented in India on 1st July, 2017, was a major taxation reform since the Indian independence. It was considered to be one of the most important policy initiatives. GST was developed with the primary objective of subsuming the multiple indirect taxes, and the introduction of the slogan ‘One Nation One Tax’ came into the picture. In addition to this, its implementation was thought to bring about a positive change for the economy and its people. But there was a big hue and cry for its implementation. Before we discuss in detail about the positives and the negatives of GST, we shall see how this concept of GST came to India.
History & Implementation
It was during the 1970s that India’s experiment with a ‘GST-like tax’ began. In 1978, the Jha Committee had suggested to levy Excise Duty as ‘MAN VAT (Manufacturing Value Added Tax)’, which could not be implemented due to the complications associated with it. In 1985, the Long-Term Fiscal Policy suggested Modified Value Added Tax (MODVAT), which was introduced in the Rajiv Gandhi government by its Finance Minister then, Mr. Vishwanath Pratap Singh, step by step, and gradually, more commodities were brought under its purview. But in 2002, it was replaced by Central VAT(CENVAT). The discussion on Value Added Tax (VAT) was initiated by PM PV Narsimha Rao and Finance Minister Manmohan Singh at the state levels. In 2005, VAT was introduced for sales tax, which was also recommended previously by many committees. The introduction of Service Tax was suggested by Chelliah Committee, initiated in 1993, which gradually expanded its base and included more and more services. Experts believed that the service sector was quite dominant after 1980, having huge potential to yield taxes; hence, if goods were taxed when produced, so should the services be.
India had several indirect taxes, which had cascading effects. In addition to this, the businesses had to deal with several agencies, which added to their cumbersome paperwork further.
During 1999-2000, an extension of VAT to sales tax was proposed and given the go-ahead by PM Atal Bihari Vajpayee in a meeting with his economic advisory panel. A committee was set up under the chairpersonship of the then Finance Minister of West Bengal, Ashim Dasgupta, which was later asked to look into the implementation of GST as well. However, the implementation of GST was delayed due to objections from the opposition. In 2014, with the BJP-led NDA government elected to power and the consequential dissolution of the 15th Lok Sabha, the GST Bill, which was approved to be reintroduced by the standing committee, lapsed. After the formation of the Narendra Modi government, Mr. Arun Jaitley, the then Finance Minister, introduced the GST Bill in the Lok Sabha. Finally, in 2016, a Constitution Amendment Bill was passed, which paved the way for GST. A GST Council, which consisted of representatives from the Centre and States, was set up to carry out the task of GST implementation. Although the Bill was demanded to be sent back by the opposition-led congress government, in August 2016, Amendment Bill was passed, and, over the next couple of days, 18 States ratified the Constitution amendment Bill and the then President Pranab Mukherjee gave his assent.
To look into the proposed GST law, a 21-member selected committee was formed. The Bills – Central GST Bill 2017 (The CGST Bill), the Integrated GST Bill 2017(The IGST Bill), the Union Territory GST Bill 2017 (The UTGST Bill), the Goods and Service Tax (Compensation to States) Bill 2017 (The Compensation Bill), after being approved by the GST Council, was passed by the Lok Sabha on 29th March 2017. These Bills, after being passed by the Rajya Sabha on 6th April 2017, were enacted as acts on 12th April ’17. Thereafter, State GST Bill was passed by State Legislatures of different States. GST was launched all over India except in Jammu & Kashmir (Jammu & Kashmir State Legislature passed on 7th July, 2017) with effect from 1st July ’17, after the enactment of various State laws.
Understanding the Tax Structure
There are two kinds of taxes- Direct and Indirect Tax, and both fall upon the income of the citizens of the country. Direct tax, as the name suggests, falls on the individual citizen’s income as the point of their earnings. Indirect taxes, on the other hand, fall on the income through goods and service consumption as and when they occur. And indirect tax is such which falls on the consumption of all irrespective of their income – rich or poor, everyone comes into its bracket. Considering this fact, the rich are considered to have consumed a small portion of their income and hence, pay a smaller portion as indirect tax; on the other hand, if we consider the ones who are needy or those unable to meet their ends, consume almost all which they earn, and hence, pay indirect taxes on almost all which they consume – paying a higher portion of their income as taxes. Here, we observe regressive taxation, where those who are earning more pay a lesser rate of taxes than those who earn less. Progressive taxation is said to be of Direct Taxes, which fall mostly on the well-off sections of society. As per experts, considering all the facts, India has more Indirect Taxes than Direct taxes.
Taxes subsumed by GST & the components of GST
Prior to GST implementation, there were many indirect taxes like sales tax, excise tax, service tax, Central sales tax, additional excise tax, entertainment tax, Octroi, cess and so on – which were absorbed in GST. There were separate forms to be filled up for each tax and to different agencies prior GST regime. Complexities and additional costs arose due to such multiplicity. With the introduction of GST, there is less paperwork with only one tax to deal with. Hence, ‘Ease of Doing Business’ was said to be made, along with increased efficiency.
There are three components with which GST is made up of – a central component (CGST), a state component (SGST) and for the inter-state movement, integrated tax (IGST). The rate of CGST and SGST is 50% each of GST.
In various stages of production, the CGST, which is paid in previous production stages, is to be adjusted (input tax credit) against the CGST due in the current production stage. A similar procedure is followed for SGST as well. SGST will not be adjusted against the CGST and other way round. For inter-state movement of supplies, IGST is applied. The Centre collects it and passes it to the states importing the supplies, only after keeping 50% of it. If the exporting states have collected any tax, it passes the tax to the states importing supplies.
Some important elements of GST
The proponents have considered GST to be beneficial to everyone in the nation, hence desirable. GST has certain following important features:
- GST has combined indirect taxes and seventeen taxes have been replaced by one tax, which has been said to lead to Ease of Doing Business.
- GST is calculated not on ‘value of goods and services’ but on ‘value addition’. The term ‘value addition’ refers to the value which is added to the raw materials and the other products procured by the producer. Here, value refers to the price at which a product is sold (Value added plus the cost of inputs purchased). The ‘Cascading effect’ of tax on tax and profit on tax is removed by this change on how tax is being levied. In addition to this, the tax burden on goods and services is also decreased. When tax is levied on the value of goods and services, taxes paid on purchased inputs are taxed again, therefore, causing a ‘cascading effect’.
- The cascading effects of each of the taxes (excise, sales tax, service tax, etc.) would be eliminated, and, across such taxes, too. This will result in decreased effective tax rates, leading to decreased prices (considering other things remain the same). In addition, there would be ease of doing business, which could boost the economic growth rate.
- Experts believe that if the black economy is curtailed, it will result in greater tax collection.
- The new tax regime was believed to simplify the supply chains, resulting in large scale supplier efficiency and, therefore, leading to economies of scale.
- The movement of goods from one state to another would be tracked automatically, and transportation would be made easier due to the elimination of tolls and the introduction of E-way Bills.
GST Tax Rate Structure
There was confusion as to how the tax rates for GST would be decided for the various items and the criteria as to which items would fall in which tax bracket. This decision was taken by the GST Council after due diligence and by consensus. India has four tax slabs under GST, which covers varied products and services – 5%, 12%, 18%, and 28%. The GST Council revises the items under the rates from time to time to reflect industry demands and market trends. The tax structure is revised to ensure that essential commodities are taxed at lower rates, whereas higher rates are taxed for luxurious goods and services. There are some major commodities that are not under the purview of GST – Alcohol for human consumption, electricity, and petroleum products. Experts have said that GST has a complicated tax structure – States and the Centre heavily tax on items such as alcohol and petroleum products and do not wish to give up their hold on such taxes. When there is a consensus, the government can still bring petroleum products under GST, but in the case of alcohol, the situation is a little complicated since a constitutional amendment would be required.
There have been some essential commodities that have been kept at zero rates of tax. The idea behind this is that items which are commonly used and a necessity (for example, food items), especially to the needy sections of society, should not be taxed, or else, they would be adversely affected by GST.
A distinction as been made between the above-mentioned items of necessity and high-end products, and it was argued that the same tax rates would not be applicable. The former was exempted or kept at a lower tax bracket and the latter had to be taxed heavily.
As already mentioned, GST came into force by passing the Constitutional (122nd Amendment) Bill by both houses in 2016. The President of India set up the GST Council, a joint forum of the Centre and States as per Article 279A (1) of the amended constitution. This council included the Union Finance Minister as the Chairperson, Union Minister of State in charge of Revenue or finance (as a member), State ministers in charge of finance or taxation or any other Ministers nominated by each State Government (as members).
As per the Article 279A, recommendations will be made by the Council to the Union and States on issues related to GST, for instance –
- Goods and services that may be exempted or subjected to GST
- Model GST laws
- The principle governing Place of Supply
- Apportionment of IGST
- GST rates which include floor rates with bands
- Threshold limits, the maximum value of turnover for the function of GST
- During natural calamities or disasters, special rates for raising additional resources
- The Council shall also be responsible for monitoring the taxation process in order to provide substantial support to the respective departments and avoid any fraudulent activities.
The GST Council had met several times since its inception, especially after when GST was launched in India, and several important decisions have been taken since then. This was mostly because a plethora of issues related to the design of GST became evident. The creation and functioning of the GST Council have been presented as a case of Cooperative Federalism, where the Centre and the States are inclined to compromise for a greater good.
Concept of Reverse Charge Mechanism
The reverse Charge Mechanism under GST is a system where the receiver/ buyer of goods and services has the liability to pay the tax instead of the supplier of the goods and services. Section 9(3),9(4), and 9(5) of State GST and Central GST govern reverse charges for intrastate transactions. In addition to this, Section 5(3), 5(4) and 5(5) of the Integrated GST govern reverse charge for the inter-state transaction.
The tax is paid under certain circumstances, which are as follows:
- Buying goods and services from a supplier not registered to pay GST
- Importer liable to GST pay under RCM
- Vendors being paid by the government departments above a specified limit (under one contract Rs. 2.5 lakh) are required to deduct tax (TDS), and e-commerce operators are required to collect tax (TCS) on the net value of goods and services which are supplied through them.
It is stated under Section 24 of the CGST Act, 2017, that a person liable to pay GST under RCM must register under GST compulsorily.
5 Years of GST
GST was viewed and marketed by many as the second tryst with destiny – a reform that would unify the nation as a single market and simultaneously assist in the Ease of Doing Business in India. Many changes have been witnessed in the last 5-years in terms of tax rates, policy, procedure and technology, completely changing the indirect tax structure in India. The authorities, taxpayers and tax experts evolved to keep pace with the changes.
Initially, experts said that there would a rise in GDP, the inflation would reduce, eliminating the cascading effect and keeping in check the black economy in the nation. GST was supposed to benefit the backward consuming states since GST is a last-point tax – tax being collected where the final sale occurs. Hence, it was considered a win-win situation.
In completion of the 5 years of GST operations, its various benefits have been enumerated along with its problems, which are said to be sorted out soon. Experts believed that since GST had some fundamental flaws, a casual rectification will not suffice. In addition to this, there have been concerns of various states which came up in the recent GST Council meeting.
Why were the states worried?
Concerns arose among the ‘producing’ States and their governments as they were not supportive of the last-point tax and feared losing out revenue on ‘Consuming’ States. States being comparatively more advanced produce more than the less advanced ones and sell the latter. Thus, it was expected that the less-developed states would be collecting proportionately more GST even though it was less in absolute terms. Hence, there was resistance to GST implementation by advanced states like Tamil Nadu and Gujrat.
Since GST proposed one tax on a particular commodity or service all over the nation, it was opposed by the States because they believed that this loss of power to fix tax rates on various commodities compromised fiscal federalism. The needs of one state would be different from the other; hence, a certain degree of autonomy is crucial. Apart from this, there have fears of losing revenue due to shifts to the GST regime from the previous tax regime. Only after the States’ concerns were addressed, they all came together on board. One cannot be an exception if all others have accepted GST. The non-implementing state (considering if all accept) will lose out on production and distribution. Its business would not receive input credit on production, nor will it be able to provide input credit on the sales made outside the state. Therefore, its products would become expensive everywhere and would eventually lead to a decline in sales.
To begin with, alcohol and petroleum products, which have been kept out of the purview of GST, the States had some autonomy in collecting revenue from them. The states could levy excise duty on alcohol and VAT on petroleum products. These provided support during the pandemic, when a sharp decline in tax collection was witnessed. This implied that cascading effect was eliminated only partially. GST was expected to eliminate this effect, raising effective tax rates on goods and services and aiding moderate inflation.
Next, for five years, Union Government was to compensate the states for any insufficiency in revenue growth below 14%, and, hence, a compensation cess was proposed on luxury and sin commodities for this purpose. It has been decided that Union Government would continue for four more years but has not yet accepted the demands of States to go on with compensation. Such a mechanism guarantees the producing states will not lose out.
Furthermore, we know that to decide on matters related to GST, there is a GST Council representing states and the Union. In case there is a lack of consensus, voting is provided. The Union government effectively has veto power since 75% of votes are mandatory to pass a resolution. It can also happen that small states can be made to vote in its favour, and, given the fact that, currently, the ruling party in the Union rules in most of the States, there are possibilities of pushing its agenda. Therefore, although there is a maintenance of federalism in the country, but it is diluted in reality. Chances are that federalism may be strengthened, because of a recent Supreme Court ruling which says that GST Council’s diktats are not binding.
In the initial years, GST collection has been below Rs. 1 Lakh crore. But, in spite of the COVID-19 pandemic, collections have been above Rs. 1.3 Lakh Crore average with a record collection of Rs. 1,67,540 crore in April 2022.
We are well aware that the economy is still at the pre-pandemic levels, but there is still a question of whether this increase in GST collection reflects the success or not.
How well has GST done so far?
Just prior to the pandemic hit, the GDP growth rate, instead of increasing, was declining quarter-on-quarter from 8% in Q4 of 2017-18 to 3.1% in Q4 of 2019-20. The entire decline cannot be attributed to GST alone, but one can say that it has substantially contributed to it by harming the unorganised non-agricultural sector (31% of GDP). Demonetisation was the first by which this sector was, being implemented 8 months prior to GST implementation.
GST was kept out in case of an unorganised sector, and yet it damaged it. The unorganised sector was divided into two categories; where first, any unit with a turnover less than Rs.20 lakh is not required to register or pay GST. Second, those units have a turnover between Rs. 20Lakh and Rs.1.5Crore are under Composition Scheme. There was no requirement for detailed accounting, and a flat tax was to be paid. They faced with severe limitations, where they were unable to make inter-state sales, or get input credit, or provide input credit to those purchasing from them. Therefore, they are at a disadvantageous position when compared to organised sector units, which are registered, provide an input tax credit, and also take advantage of input credit on their procurement. Hence, if small businesses are joining the GST scheme, their accounting costs are rising, and, on the other hand, if they are outside GST, they will not be able to provide input credit, and, those purchasing from them face higher costs unless the prices decrease. Either way, they are losing out. The unorganised sector units become less competitive than the others, resulting in a shift of demand to the organised sector units. Hence, there is a boost in the growth rate of the organised sector at the expense of the unorganised units. The inequalities also rise with a decrease in demand, followed by slow economic growth in India.
The organised sector collects 95% of GST; hence, with the growth of this sector, the collection of GST also grew. This has been confirmed by the huge increase in direct tax collections, collected from the affluent section. Basically, the rapid increment in GST collections when the economy was stagnant points to the issues faced. The increment in indirect tax collections was bound to be expanding.
Having a better compliance was given as one of the reasons for an increased collection of GST, but it also indicates the degree of tax evasion in the organised sector. The experts say that due to the multiplicity of rates and complicated rules, GST was unable to check the growth of the black economy. Although a group of goods and services is nationally having one tax rate, across goods and services, there are numerous tax rates. This becomes contradictory to the requirement of GST that there will be one tax rate, but in an economy like India, having poverty and a diverse production structure, it is not feasible. There have also been countless changes in rules, and the Courts have been piled up with cases. Furthermore, there has been detection of fake companies claiming ITC, and manipulations and corruption have been seen in E-way Bills.
In addition to the complexities, there has been less clarity in official declarations, due to which chartered accountants and businesses complain of difficulties. It is required for companies operating nationally to file forms every month for each state of operation which increases the number of forms. Due to the large volume of data required to be uploaded, GST Network functioning has caused issues from time to time. Since computerisation is an essential component of GST, compliance cost is high, especially for the unorganised sector. Compared to the well-developed advanced states, the less-developed states have more unorganised sector and hence, suffers more due to declining unorganised sector. Thus, although consuming states are supposed to benefit, inter-state disparities have magnified.
The adverse impact faced by the large unorganised sector is one of the challenges posed by GST. The presence of black money in the organised sector of the Indian economy, resulting in low direct tax-to-GDP, is another challenge, forcing the government to collect taxes more and more from indirect tax (GST).
Experts believe that since GST is a last-point tax collected at the final point of sale, levying it on the MRP of the final product and collecting it at the last point should be done instead of doing it at each production and distribution stage. It is believed to bring simplicity, eliminating issues arising due to e-way bills, input credit, filing hundreds of forms, reverse charge, inverted duty structure, etc. In addition to this, the complexities faced by the unorganised sector and demand shifting away from it would be removed – resulting in higher growth and employment. A simplified structure would enable easier detection of fraud, reducing the generation of black income.
Even after 5 years of GST implementation, GST Appellate Tribunal has not yet been constituted, the absence of which has led to the only alternative remedy of having writs and the high courts are flooded with them. GST Appellate Tribunal constitution will provide relief to the assesses and judicial system.
It was noticed that by the time the manufacturing sector could reap the full benefit of a unified market, the pandemic disrupted economic activity. The sector is again back getting a boost from programs such as Atmanirbhar Bharat and Central Government’s PLI scheme. In addition to such assistance from the government, availing ITC on various inputs or input services should be relaxed, which are currently blocked. Tax rate structures should be simplified, which can boost the sector further.
As the Indian economy is recovering from the after-effects of the pandemic and foreign companies are seeking for a new base, India is at a crucial juncture after 5 years of the GST journey.
Just because other countries have GST, the thought that India must also have GST is not true. Unlike other large economies of the world, India has its own complex issues, which the current GST is magnifying instead of resolving. A structural revamp is the present need to make the situation stable and benefit all sections of society. There is still time to retrieve the situation.