GST changes: tinkering at the margins won't help

The GST Council’s 22nd meeting, in Delhi on October 6, was an event that all people connected with the GST were eagerly looking forward to. It was expected that the government would respond to criticisms that it is not doing anything to prevent the Indian economy from going into the “intensive care unit”, by making significant changes in the GST law.

Being an indirect tax, GST has the reach to significantly impact the economy. Though changes were made in the law at the meeting, they seem too insignificant — rate reductions were announced on some items, an e-wallet scheme with no particulars was announced for exporters, the reverse charge mechanism and the e-way bill requirements were deferred and compliances in respect of filing were relaxed for some taxpayers.

For reasons best known to them, when GST made its entry, the lawmakers decided to reproduce all the items that were present in the erstwhile Central Excise Tariff and assign GST rates to each of them. Since July 1, the rates of taxes on more than 100 items have been tinkered with.

An additional 27 items were handpicked for a rate reduction on October 6, including plain chapatti, roti and dried mango. Those drafting the GST law have perfected the art of complicating tariff entries. The description for one of these items where the rate was reduced from 18% to 5% reads thus:

“Food preparations put up in unit containers and intended for free distribution to economically weaker sections of the society under a programme duly approved by the central government or any state government, subject to specified conditions.”

The specified conditions go like this: “If the supplier of such food preparations produces a certificate from an officer not below the rank of Deputy Secretary to the Government of India or not below the rank of Deputy Secretary to the state government concerned, to the effect that such food preparations have been distributed free to the economically weaker sections of the society under a programme duly approved by the central government or the state government concerned, within five months from the date of supply of such goods or within such further period as the jurisdictional commissioner of central tax or jurisdictional commissioner of state tax, as the case maybe, may allow in this regard.”

In the midst of all this drafting, the lawmakers seem to have missed the main point — if the food preparation is intended to be supplied free of cost to economically weaker sections of society, should it not be exempt from GST, instead of being taxed at 5%? There is a pressing need for the government to form a committee to reduce and simplify the GST tariff. Ideally, the GST tariff should be restricted to about 100 chapters instead of getting into minute detail on the contents of those chapters.

Exports hit
In the first quarter after the implementation of GST, exporters have been hit the hardest. A series of notifications were issued, providing exporters with the option of charging IGST in all their invoices and claiming a refund, or not charging IGST by either issuing a bond or providing a LUT.

In practice, this is what happened: those who charged the tax and claimed a refund found that the government’s bank balance is not sufficient to issue refunds; those who were permitted to execute a bond were forced to get a bank guarantee to accompany it; and the ones that had to execute a LUT found that the process was being delayed. The need for a bank guarantee was relaxed in early October.

Each one of the above situations resulted in the working capital of exporters getting blocked which, in turn, limited their capacity to export further. An e-wallet scheme with not much by way of the nitty-gritty has been announced. Considering the fact that technology and GST have had a tumultuous time together till now, exporters cannot be blamed if they are wary as to how the e-wallet would operate on the internet.

The GST Council decided to hike the limit for the composition scheme to Rs 1 crore and permit quarterly filing of returns for taxpayers with a turnover upto Rs 1.5 crore. Taxpayers with turnover upto Rs 1.5 crore have been exempted from paying GST at the time of receipt of advances. The reverse charge mechanism, which has caused a lot of trouble, has been deferred till March 31, 2018. Ideally, it should be removed from the law.

The e-way bill system is being unleashed in instalments and is expected to be completely operational by April 2018. GTA services provided to unregistered persons have been GST-exempted. All these measures are to be welcomed as they would not only ease the compliance burden for these taxpayers but would also ensure that traffic to www.gst.gov.in is not very heavy, which would benefit the other set of taxpayers.

After all these relaxations, the government is of the opinion that 90% of the taxpayers would be filing their returns quarterly. If this is true, the question that needs to be asked is whether the concept of matching of invoices and filing three forms monthly is necessary for 10% of the taxpayer population. The entities in the 10% would invariably be dealing with registered persons — a fact that would render the concept of reverse charge for purchases from unregistered suppliers superfluous.

The announcements after the meeting of the GST Council enthuse confidence that the government is prepared to lend a sympathetic ear to grievances of taxpayers and amend the law. However, considering the all-encompassing nature of GST, this approach is at best only a temporary fix since almost every taxpayer would have a grievance.

At some point in time, the GST Council should look at the GST law as a whole and make changes, instead of tinkering with individual pieces of the law where taxpayers have had issues. If the latter approach continues, it would mean that as a law, GST would be a work-in-progress ad infinitum.

(The writer is a Bengaluru-based tax expert)