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GST One Year On: Monumental Reform or Monumental Mistake?

If the GST council does not simplify compliance mechanisms and address the issues of working capital, this ‘monumental economic reform’ will soon turn into a monumental mistake.

The 28th Goods and Services Tax (GST) Council met on last Saturday, July 21st 2018, in Delhi. As this was the first meeting after the one year anniversary celebration of GST rollout, one would expect the GST council to consider key issues that have impacted the economy over the last year. Instead, it turned out to be a sham where some minor adjustments were made and the key issues were left unaddressed. Before understanding the structural issues, let us look at the statements issued during the “GST Day” celebrations.  

Addressing people via his Twitter handle, Prime Minister Narendra Modi had termed GST a  “vibrant example” of cooperative federalism. “I congratulate the people of India on the special occasion of GST completing one year. A vibrant example of cooperative federalism and a ‘Team India’ spirit, GST has brought a positive change in the Indian economy. #GSTForNewIndia,” he had said in a tweet. Union Minister Arun Jaitley called the GST regime a “monumental  economic reform.” However, further analysis of the government’s claims shows a much different picture.

Blocked Working Capital Will Affect Public Consumption and Public Finance

In independent India, all governments have updated their tax policies periodically. But until the implementation of GST, no governmental measure had blocked the working capital of businesses. According to government estimates, since GST was rolled out, Rs 5.30 lakh crore of working capital has been collected under Inter State GST (IGST) category. More than 50 % of it is still stuck in the kitty of the Ministry of Finance. The Central Government does not know whom to repay it to, and when. Because of the high rate of IGST on each transaction that comes under its purview, Rs 5.30 lakh crore, which would have been used to enhance production capacities, is blocked. Of this amount, only Rs. 2.25 lakh crores has been disbursed to the states on a monthly basis. This scenario is detrimental to the growth of the manufacturing industry.

Unless this issue is addressed urgently, the working capital will gradually transform into unproductive capital and the central ledger will be fed with this ever-increasing inflow. This, in turn, will impact both private consumption and public finance. Since the government’s think tanks are claiming a reduction in the fiscal deficit, for the time being, it will mislead the nation and financial planners. If these claim about the fiscal deficit are correct, it should reflect in the interest rates fixed by Reserve Bank of India, which is not happening right now. Thus, sorting out IGST issues and unblocking working capital should have been the focus of  GST council.

Widening of the Tax Base

The second important issue lies in procedural reforms. The Economic Survey 2017-18 states that under GST, the tax base has widened from 6.4 million assesses to 9.9 million assessees. 6.4 million migrated from existing tax administrative systems into the GST network and on the top of them, 3.5 million new assessees enrolled under the new system. Based on this, Arun Jaitely, in his 2018-19 budget speech, had said that because of GST, as promised to the nation, the tax base had widened. However, the question is – whether the growth in the number of assessees is reflected in the growth of tax income? According to government data given below, this is not the case.

A Glimpse of GST returns, turnover, and tax liability, by firm size (July-December 2017)*

Firm size (Annual Turnover) % share in
Filed Returns Turnover Tax Liability
Below threshold (< Rs. 2 million) 32.2 0.4 0.9
Composition group (Rs. 2-10 million)  36 2.4 4.4
Small and micro enterprises (Rs. 10-50 million) 22 6.8 10.5
Medium enterprises (Rs. 50 million-1 billion) 9.2 24.1 29.8
Large firms (> Rs. 1 billion) 0.6 66.2 54.4
Total 100 100 100

*Source: Economic Survey of India 2017-2018

The GST Act exempts many items and also exempts businesses with an annual turnover up to Rs. 2 million. The above table clearly suggests that of 9.9 million taxpayers, 32 per cent are exempted from paying any tax as their turnover is below the Rs. 2 million threshold set by the Act. The claimed growth in the tax base is because of the enrolment of these small and self-employment based entrepreneurs, who registered under GST network out of fear. It is the working capital of these micro, small and medium firms that is getting blocked under the GST system.

The table above further testifies that 68.2% of those who file their returns under GST, contribute only about five per cent of total tax revenues, and less than five per cent towards total turnover. Still, they are forced to file returns thrice a month, spending time and money from their business activities, which otherwise could have been put to productive use. In order to understand whether the so-called ‘One Nation One Tax’ yielded any better results for the nation in terms of tax proceeds, we need to further study the data by categorizing the widened tax base in terms of firm size.

Filing Returns: A Hell of Task

Filing returns is a headache for these small and micro entrepreneurs, most of whom are self-employed in their family firms. The new tax administration regime mandates the filing of over 30 returns in a year. Every month, a GST taxpayer has to file a return for inward supplies, outward supplies, and a consolidated return for every month as well as a consolidated return at the end of the year. If this filing is not done in time due to any reason, which happens mostly due to GST network breakdown, it is the taxpayer who has to pay the penalties.

If we extrapolate the loss of production and the net tax proceeds accruing to the government, it will definitely show that filing these many tax returns is not necessary. On top of that, businesses are forced to pay considerable incomes to GST Suvidha Kendras. Additionally, changes are constantly being made to the GST design which makes filing returns a Himalayan task for rural entrepreneurs. To simplify this, the returns should be redesigned into a palm-sized return with basic details, and one consolidated return for each quarter, so that the assessing authorities can analyze for any tax evasion. Unless the compliance mechanisms are made easy, it is not going to help the taxpayers or the nation. If the GST council does address this, and the issues of working capital, the ‘monumental economic reform’ will soon turn into a monumental mistake.

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