One of the focus areas of the Congress manifesto is a section on the Goods and Services Tax called “Goods & Services Tax 2.0”, which lays out the party’s intentions about reviewing and replacing the tax regime introduced in July 2017 with a new one.
To summarise that section:
- GST 2 would be based on a single moderate standard rate, with a special rate for “demerit goods”. The standard rate would be revenue-neutral to current revenues of states and Centre.
- Real estate, tobacco, petroleum and liquor will be pulled in under GST in the new system, while certain essential goods (drugs and vaccines) would be zero-tax.
- All exports including service exports would be exempted from GST.
- Threshold exemptions would also apply to small inter-state businesses.
- There will be no GST liability on the purchaser via the reverse charge mechanism.
- The e-way bill system will be abolished, with tax evasion detected mainly through the risk management mechanism and a stronger intelligence machinery.
- Some share of GST revenues will be directly allocated to panchayats and municipalities.
- Tax-payers will have to fill up a simpler single quarterly return, and an annual return.
- The GST Council will be served by a permanent secretariat of experts and the minutes of its meetings will be published.
- Tax evasion under GST 2 will be considered a civil offence that attracts civil penalties with criminal prosecution only in cases of conspiracy, outright fraud and corruption.
Each of these commitments attempts to address some sort of problems that have arisen with the current GST system. Let us address them one by one.
The current GST tax code is by any standards the most complicated GST code in the world. Most countries have some variation of a three-rate system – with a zero-rate, standard rate, and a special rate for demerit goods.
This works far better in practice than nit-picking over whether GST charges should vary when dining in a restaurant versus room service as has occurred in India.
Indian GST collections have not only been consistently below expectations, there has been a litany of complaints about the red tape within the system. There is definitely room for review and reform.
Demerit goods are a grab-bag term used to define what is described as “sinful” stuff (such as alcohol and other recreational drugs, tobacco, sex-work where it is legal) and in some places, goods with high environmental impact like diesel generator sets and plastic bags.
Apart from the moral argument of charging higher rates for sinful things, there is the pragmatic argument that people are prepared to pay more for pleasures.
The World Health Organisation also requests member nations to tax, and otherwise control, the sale of many harmful sinful substances. Punitive taxation, for instance, is a huge lever in the fight to reverse climate change.
Real estate, petroleum and liquor
Petroleum and liquor were kept out of the ambit of GST because many states would prefer to charge their own (higher) state excise rates. But this could change if there is a revenue-neutral rate that gets the states on board.
The GST pertaining to real estate is a mess. I do not pretend to understand it (and I suspect nobody does)! Until 2018-’19, GST was levied at 12% with input tax credit on payments made for under-construction property or ready-to-move-in flats, where the completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate was 8%.
There is a new rate of 5% for “normal” under-construction housing without input benefits and for affordable housing at 1%.
With a huge stock of unsold houses and incomplete constructions especially in the Delhi-National Capital Region, realtors have complained bitterly about their stock of unrealised input tax credits. Presumably the Congress is stating its intention to simplify processes and stimulate activity. How they will do this is a big question mark.
Exemption of exports or rather, simplification and acceleration of processes for exporters, would give a huge boost to trade. Exports are already zero-tax but the current system of GST refunds has resulted in a huge backlog where small exporters have been forced out of the market.
As things stand, exporters can pay the tax and then claim a refund. If that refund does not come in time, working capital is stuck. Many exporters complain that the system is extremely slow. Exporters can also claim a rebate on the basis of input tax they have paid (on expenses, which will have been charged GST). This rebate process is also slow, and the paperwork is cumbersome.
Another problem that crops up repeatedly in places like the Delhi-National Capital Region or Hyderabad, or indeed with small service firms everywhere, is the requirement for inter-state businesses to file GST returns no matter what their turnover.
Normally, a small business below the threshold limit (those with an annual turnover between Rs 20 lakh and Rs 40 lakh in different regions) can avoid the painful duty of filing three GST returns a month.
But say, there is a small firm based in Delhi, which does a little business in the satellite towns of Noida (Uttar Pradesh) or Gurgaon (Haryana). Well, that firm could be below the threshold but it will still have to file three GST returns a month in each jurisdiction. Firms operating out of Hyderabad have also run into this problem due to the bifurcation of Telangana and Andhra Pradesh in 2014.
It can indeed happen to a small service firm anywhere. For instance, a graphic designer from Kolkata who does business in Bengaluru, and a boutique ad agency based in Delhi that does work in Chandigarh and Uttarakhand.
An exemption from mandatory filing on inter-state business would spare businesses under the turnover threshold a lot of pain.
The reverse charge mechanism under the GST regime is technically complex too.
Let us say “A” sells goods or services to “B”. “A”, is not registered under GST. “B” must then pay the GST applicable directly to government. Unsurprisingly, this involves lots of complicated paperwork, and leads to enormous confusion. It also discourages the use of small, unregistered suppliers below the GST threshold since the purchaser would rather avoid the reverse charge hassle. This discriminates against small businesses, which employ approximately 75%-80% of the workforce in India.
E-way bill system
Then there is the e-way bill system, introduced to simplify moving goods across the country.
The earlier system involved trucks being stopped at every state border, with state excise officials checking cargo, applying state taxes and taking bribes and so on.
The GST regime did away with that system. The vast majority of goods do not attract state excise anymore. The e-way bill, an electronic document, now tracks the movement of goods and transporters are supposed to produce it if a GST inspector asks for it.
In practice, however, trucks still get stopped at state borders and transporters complain that they are still vulnerable to being arm-twisted for bribes by state excise officers.
The abolition of e-way bills, as promised by the Congress manifesto, would mean that trucks carrying goods would not be stopped at state borders anymore. It promises that all the checking will be done inside the computer system and via a “stronger intelligence mechanism”.
Number of GST returns
In line with this simplification, the Congress also promises to reduce the need to file GST returns to five returns a year from the current three returns a month (plus an auto-fill return every month). This would naturally be a big relief. Treating most GST offences as civil offences would also reduce the fear of harassment.
Possible or impossible?
The GST council definitely needs a permanent secretariat with experts who can monitor and tweak the system as required. It is surprising that it does not have such a secretariat. Devolution should mean that some revenues come to villages and cities directly rather than being routed via state legislatures.
To summarise again, this is mostly good stuff and it is aimed at reducing the glitches within the system and encouraging people to actually work and earn, rather than sweat it out, filing return after return.
Is any, or all of it within the realm of the possible, regardless of which government comes to power?
Well, the states, which are represented at the GST Council, would have to come on board with much of it. Working out a revenue neutral single rate may be tricky in practice. State excise officials will oppose the abolition of e-way bills. Handing revenue directly to panchayats and municipalities will probably be opposed by most state governments.
But it is good that these issues have been highlighted and placed on the policy agenda at the least. For a while, the GST Council operated almost unanimously since most state governments belonged to the same party. That situation has already changed after last year’s Assembly elections in states including Karnataka, Rajasthan, Chhattisgarh and Madhya Pradesh. Pushing through GST2 could involve a lot of fancy footwork and some fireworks.