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GST reforms: Recent issues and reforms required

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Ritwik Mehta
Ritwik Mehta
I am a policy research analyst with having a deep interest in economics. I am a freelance digital marketer and a data science enthusiast.

“GST saves us from 17 horrifying taxes that amount to 31% in India. With GST, India has become one market. Some states levied entertainment tax ranging from 35% to 110% while there were 235 items on which 31% tax was levied. But under GST, there will be only 10 items under the 28% slab. Everyday use items will come under the 5% tax slab, and everything will go online” 

Above were the words of our ex-FM Sh. Arun Jaitley while responding to all the questions raised by the opposition in the parliament. GST was introduced on June 1, 2017, and it has been awarded the title of ‘Mother of all tax reforms’ by many economists and politicians. It was quite historic because, in a federal structure, both the Centre and States had the power to impose an indirect tax on goods and most of the states had multiple laws that gave them this power. It was an arduous task of getting all the States on the table for discussion and developing a consensus in the Parliament. With the earlier indirect tax regime of VAT with 14.5%, excise at 12.5%, the cascading effect of tax on tax, and filing multiple returns, today there is only one tax, everything online, no truck queues, and no inter-state barriers. 

But this is India, and the experts soon found the loopholes in the system and today fake GST invoices and e-way bills were issued. Recently a GST fraud of Rs 33 Crores came to the notice. Even during the COVID-19 pandemic, a tussle can easily be seen between the Centre and State where the states are demanding full compensation but the Centre has put forward the option of market borrowing to bridge the gap. The recent CAG (Comptroller and Auditor General of India) report on GST stated that the Centre government violated the GST Compensation Cess Act, 2017 and short-credited the cess fund to the tune of Rs 47,272 Crore during 2017-18 and 2018-19. 

Problems with GST

Those conceptualizing the concept of GST wanted that it should be made so simple that a common person can file the returns himself and need not give a fee to CA. But today, the GST with its dependency on technology has made it much more complex for a taxpayer to upload invoices, take actions in ANX-2 to claim ITC (Input Tax Credit), and report missing invoices. With no facility for uploading real-time invoice, the taxpayers have to spend extra efforts to upload the invoices with accurate details continuously. Another pain involved with the system is frequent matching which is the process of matching the invoices uploaded by the supplier with the books of accounts to claim the input tax credit. The taxpayer has to dedicatedly spend time to do the same.

Following the same, we have problems with the recipient who has to continuously keep an eye on the supplier whether he has uploaded the invoices on the portal, and therefore report for the missing ones. 

Technical Glitches with GST

Limits of file size and HSN code issues have been the major issues since January 2020. The government pushing the dates of implementation of E-invoicing and QR code shows that the government and the system itself isn’t still prepared for this technology-driven taxation process. The scheme of E-wallet for exporters that was proposed in 2017 is still a dream for the government. 

Rather than giving the option of filing TRANS-1/2  electronically or manually, the GST department focuses on the online system in which many taxpayers fail to complete the filing due to technical glitches. The same issue was raised in the case of Adfert Technologies Pvt. Ltd vs Union Of India And Others and M/S. Shree Motors vs Union Of India on 18 March 2020. 

A pertinent question arises on the reliability of GSTR-2A which is downloaded from the online portal because many times it does not match with the 2A excel sheet. While filing GSTR-1, the information is not accurately captured in GSTR-2A and not even updated on a real-time basis. Thus, an invoice of previous months does not get reflected in the month to which it relates, but in the month it is uploaded. The biggest lacuna is that the GSTR-2A report can be downloaded on a monthly basis rather than quarterly, half-yearly, or yearly. 

Even if a taxpayer has a valid invoice and is not reflected in the GSTR-2A reports due to technical problems, the ITC will get blocked. There is no facility for auto-calculation of ITC as per rule 36(4) of the CGST Rules, 2017. Thus, the onus of calculating is still on the taxpayer who still doesn’t understand the working of the so-called “simple Tax system”. 

For performing the GST audit, the taxpayer must have the Windows 7 or above Operating System installed along with MS Excel 2007 and above, GST em-signer, and updated versions of internet explorer and Java 1.6. The GST department must understand that taxpayers are not computer experts! This is one of the main issues that force the common man to go to CAs. 

Registering for the first time is itself a cumbersome task as you need to put all your documents in a file of 100 KB only! While there are online tools to compress the file size, why bother the taxpayer? Can’t it be increased to 10-20 MB?

With a total of 5 Crore taxpayers as of 1st April 2019, the website allows only 3 lakh taxpayers to file the GST returns, which also gets crashed multiple times! Many times taxpayers have to face the wrath of late filing just because of website traffic. The OTP is not received in the mailbox of the taxpayer which also delays the process. 

Downloading the GSTR1 and GSTR-2A data takes 20 minutes which should be available instantly on the website. 

Reforms Required in the GST

There should be a 3-tier GST structure. Under the first tier, the exempted goods and services along with zero-rating of exports should be placed. The second tier should contain a uniform 15% tax. The third tier should contain 6-12 well-specified goods and services like tobacco products, petrol, diesel, cars, and luxury hotels. This will lead to an improvement in Ease of compliance, monitoring, and analyzing while a drastic decrease can be expected in the cost to taxpayers and the administration. 

100% invoice matching isn’t followed anywhere. Thus, it is desirable to match the invoices above a certain value like Rs. 10,000. 

The analysis of the GST council is done by the ‘fitment committee’, consisting of nominated officials of the Tax Research Unit in CBIC, and some other officials of the commercial taxes departments from some states. Thus, there is an urgent need for technical experts with expertise in economics, administration, accountancy, and law so that better decisions can be taken with rigorous research. The tax system can’t be improved until and unless it doesn’t get audited well and transparently. CAG isn’t provided with the whole data. Thus, full access to pan-India data should be provided for a detailed audit. 

Housing For All is the flagship scheme of the government and since the 1% GST rate is applicable on affordable housing units, therefore, in order to achieve better results, the limit on the value of the unit must be raised from INR 45 lakhs to INR 75 lakhs (for non-metro cities) / INR 1.5 Crore (for metro cities). The carpet area must also be redefined under RERA by increasing it from 90 sqm to 120 sqm (in non-metro cities) and 60 sqm to 90 sqm (in metro cities). 

Solving the fake invoice industry 

The GST Council must expand the coverage of e-invoicing up to Rs. 50 Crore within this financial year and up to Rs. 5 Crore by July next year. Using the technology and reverse-charge mechanism, compliance will improve, the base will broaden and misuse of the input tax credit will decline. 

It is high time to rationalize the rates of electrical transformers, railway wagons, textile products, plastic bags, and solar panels to avoid inverted duty structure. 

It has been said that States are not comfortable bringing petroleum and electricity under the GST fold but since the economy is recovering, this is the best time to bring this biggest reform. Electricity has to be removed from the Seventh Schedule (Entry 53) and must be put along with other taxes in the GST. The only way to deal with the issue of State consumption tax is to have a separate excise on these items to safeguard revenues. 

Exports should be zero-rated and not be subject to IGST, following an international practice. 

The CGST rule of payment refund is quite a cumbersome process and can be easily simplified based on the submission of Form GSTR 1 and GSTR 3B without waiting for cross-verification of ITC claims in GSTR 2 for a period of six months. 

GST was a huge bargain when States gave up their rights to collect sales tax while the Centre gave up excise and service tax. Australia also shares the GST anniversary with us where the rates have been constant at 10%. Thus, a single rate in India can be a huge reform, and a matter of discussion too! But there is an urgent need for structural reforms in GST, in order to be a leading economy. 

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Ritwik Mehta
Ritwik Mehta
I am a policy research analyst with having a deep interest in economics. I am a freelance digital marketer and a data science enthusiast.
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