How much Good and Simple is the present the GST?

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When the clock struck 12 on 30 June 2017, India stepped into long awaited One Nation One Market through implementation of Goods and Services Tax (GST). GST came into effect by 101^st Constitutional Amendment Act following the passage of 122^nd Constitutional Amendment Bill. It is hailed as a Good and Simple Tax because of emphasis on minimising the cascading effects of tax, rationalising tax structures, improving tax compliance and thus aiming at improving the ease of doing business.

Having said that the 101^st amendment has undoubtedly opened a new chapter in India’s economic history, the present GST has certain drawbacks too. The shortcomings of GST can be broadly classified into complexity of tax structures, problem of tax compliances and technical glitches.

1)      Complexity of Tax Structures

GST was envisaged as a Good and Simple Tax but the present tax structure with five different rates and cesses is far away from being simple. There have been reports about how milk has been subjected to different rates. However, it merits attention that this problem is ought to occur in a country which is hostage to huge income inequality. Thus the trade-off is actually between having a good tax (which in my view is a tax which takes into consideration the impact of tax burden on different segments of the society) and a simple tax (which is to approach towards a unified tax rate as close as possible).

Given the fact that only about half of the Indian economy comes under the ambit of GST, the items subjected to GST have mostly been taxed stiffly. India has one of the highest tax rates in GST in the world. Further imposition of cesses goes against the principle of Value Added Taxation. Interestingly, the state finance ministers don’t have much objection to distorted tax structures and its repercussions on growth because of the Compensation Scheme. However, there is optimism that when the tax buoyancy improves the tax rates will be slashed.

2) Compliance Problem

The tax compliance has become major hurdle particularly for MSMEs. In the earlier tax regime, entities with a turnover of Rs1.5 crore per annum were exempted from payment of excise duty. That threshold has been lowered to Rs20 lakh for most of the states under GST. As these sectors are handicapped of the essential infrastructure required for tax compliance so they have to depend on intermediaries which add to their compliance cost.  Against this backdrop , the release of GST app after a week of its implementation can be called as a faulted start.

The delayed input tax credits have also affected working capital requirements of MSMEs  badly. The government had announced composition scheme for the tax payers (threshold limit 1.5 crore) but there are not much takers of this scheme because it is only for intra state supplies and input tax credits can’t be claimed by a dealer opting for this scheme.

3)      Technical glitches

IT is the backbone of GST. Industry has voiced concerns over the issues faced during matching invoices and other tax filing procedures.

The above limitations merit discussions but also taking into account that the government is constantly making efforts to take measures for improving the GST. Slashing of rates on 200 items in November 10 is a much appreciated move. The average shortfall of revenue has also narrowed. The improved ratings in the Ease of doing business and Moody’s ratings allude to the fact that in the long run India’s economy will benefit from this reform. However, going by Keynes statement that in the long run we are all dead, a good policy requires both short term and long term consideration. The government could have introduced GST in phases, by initially targeting companies and then taxing MSMEs. This would have given breathing time to MSMEs to equip themselves with the necessary infrastructure before this major overhaul. The government is mulling direct tax reforms. The government has already set up a task force to draft a new direct tax legislation. Hope more wisdom will be reflected while implementing Direct Tax Reforms.