GST In India – Reflections Of Five Years

<p style="text-align: justify;">Recently, when called upon to write on the completion of 5 years of the Goods and Services Tax (GST) regime in India, the country&rsquo;s Finance Minister (FM), Ms. Nirmala Sitharaman, stated, &ldquo;GST has emerged strongly after facing turbulence from the Covid-19 global pandemic and its fallout.&nbsp;</p><p style="text-align: justify;">It is to the credit of the GST Council that the Centre and the states held each other&rsquo;s hand to face the crisis and lift our economy onto the path of recovery. It is this working together that has made India stand out now as the fastest growing economy, as projected by many, this year and the next.&rdquo;&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Is India&rsquo;s GST a Tax Reform?</span></h2><p style="text-align: justify;">When introducing the Constitution Amendment Bill on GST in India&rsquo;s Parliament in 2015, it was then touted as revolutionary tax reform.</p><p style="text-align: justify;">Without a doubt, there have indeed been many positives in the past five years since the introduction of GST, and no debate is required over it. A few of them have been real standouts, such as &ndash;&nbsp;</p><ul><li style="text-align: justify;">subsuming (merging) multiple Central and State levies into a single tax and fungibility of tax credits for utilization,</li><li style="text-align: justify;">abolition of check posts at State borders,</li><li style="text-align: justify;">electronic waybills for tracking the physical movement of goods,</li><li style="text-align: justify;">electronic filing of tax returns on the GSTN portal and electronic invoicing.&nbsp;</li></ul><p>GST has eliminated the tax arbitrage between states under the CST/VAT regime. This has led to a manifold increase in logistics supply chain efficiencies.&nbsp;</p><p>But are these changes enough to hold India&rsquo;s GST to be tax reform in the well and true sense of the term?</p><p>One of the essential requirements for introducing tax reforms recently in many developing and transitional economies has been to evolve a tax system to meet international competition requirements. In an export-led open economy, the tax system should not only raise the necessary revenues to provide the social and physical infrastructure but also minimize distortions.</p><p>India&rsquo;s approach to tax reform under GST emphasized minimizing distortions in tax policy to keep the economy competitive. But minimizing distortions implies gradually reducing the share of GST in total indirect tax collections. Minimizing distortions also means reducing marginal rates of GST.</p><p>This also calls for lowering differentiation in tax rates to reduce unintended distortions in relative prices.</p><p>To achieve this, the approach adopted is broadening the tax bases as one of the key focuses. A key indicator of the reduction of distortions in tax legislation is the low level of litigation one witnesses in the domestic tribunals or courts in that country.&nbsp;</p><p>Let us look at all these aspects (GST Collections, Tax Rate Reduction, and reduction of GST Litigation) in some detail here below with the help of developments, tax rate amendments, rulings, and judgments notified in the public domain in the past five years:</p><h2><span style="font-size: 14pt;">GST Collections&nbsp;</span></h2><p>Any indirect tax burdens the poor much more as it is not levied merely based on the affordability of goods or services of a person. Hence, it is safe to assume that any tax reform on the Indirect Taxes front will gradually reduce the tax burden in the medium to longer term.&nbsp;</p><p>If we look at the average ratio in tax collections in OECD countries, two-thirds of total taxes are direct taxes. This was also informed by the then FM, Mr. Arun Jaitley, during the debate in the lower house of Parliament at the time of the introduction of the GST bill. The FM had assured them that the GST Council would focus on capping the GST collections.</p><p>Notably, in the GST regime, the average monthly GST collections have increased from Rs 1.04 lakh crore in 2020-21 to Rs 1.24 lakh crore in 2021-22. The average collections in the first three months of 2022 are Rs 1.55 lakh crore.&nbsp;</p><p>In her own words, India&rsquo;s current FM has stated that &ldquo;It is a reasonable and fair expectation that this steady increasing trend will continue.&rdquo; This statement virtually rules out any possibility of a gradual reduction in GST collections. Therefore, GST may not qualify as tax reform on this count alone.</p><h2><span style="font-size: 14pt;">GST Rates&nbsp;</span></h2><p>In the pre-GST regime, on most items, the cumulative rates of indirect taxes levied by the Centre and the States in India were more than 31 percent.&nbsp;</p><p>However, under the GST, the rates for over 400 goods and 80 services have been reduced. The highest 28 percent rate is restricted to sin and luxury items. Out of a total of 230 items in the 28 percent slab, nearly 200 have been shifted to the lower slabs.</p><p>Here it is essential to understand that the 28 percent rate slab in GST was meant only for demerit or &lsquo;sin&rsquo; goods such as aerated beverages. So, the &lsquo;shifting of close to 200 items from the 28% slab&rsquo; was made mainly because those goods were not supposed to be put under that slab in the first place as none of them were &lsquo;de-merit&rsquo; items.&nbsp;</p><p>This aspect becomes even more relevant when viewed in the context of the Parliamentary debate on the GST Bill, wherein the then FM had said the government would shun the approach of high tax rates and instead focus on a smoother and investor-friendly tax policy to boost industrial activity and generate higher revenues.&nbsp;</p><p>&ldquo;We are interested in creating a situation where we revive that sentiment, " he told the Parliament. &ldquo;My approach has been that we try and resolve disputes. We try and end arbitrariness. We try and give as much relief to the vulnerable as possible.&nbsp;</p><p>On 80% of products, total Centre and State taxes are now up to 27%. We will rationalize this and reduce the tax rate&rdquo;, he stated.</p><p>It is pertinent to note that in one of his reports to the Government of India, the then Chief Economic Advisor (CEA) had recommended that the GST rate should be capped at 18 percent, and a different higher rate could be considered for a few de-merit goods.&nbsp;</p><p>This cap was prescribed based on the rationale that &ldquo;the more you lower your tax rate, the more your GDP will grow, as the number of people who don't pay tax will lessen. Agreeing with this rationale, the Country&rsquo;s Prime Minister, Mr. Narendra Modi, too had stated during the Parliamentary debate that &ldquo;consumers and small businesses will gain tremendously. Small businesses will feel more secure with this. Small business is our strength.&rdquo;</p><p><strong>GST in the Recent Situation&nbsp;</strong></p><p>Yet, recently, GST has been levied even on unbranded mass consumption items such as pulses, cereals like rice, wheat, and flour (atta), and certain other items such as curd, lassi, puffed rice, etc. The GST has been levied at the rate of 5%, whether branded but packed in a unit container (&ldquo;pre-packaged and labeled&rdquo;), with effect from July 18, 2022.&nbsp;</p><p>Another concern is that renting residential houses, which were unconditionally exempted from GST till July 17, 2022, has been brought under the GST net in exceptional cases. Giving a residential apartment for rent to any person holding GST registration will now attract an 18% GST.&nbsp;</p><p>Furthermore, the input tax credit (ITC) of GST on this rent paid by recipients, though registered under GST, may be disputed by the GST Authorities as current provisions in the GST statute prohibit ITC of GST paid for any service for personal consumption. However, residential property is most likely to be used for the habitation of business enterprise employees, which is personal consumption.</p><p>Secondly, tax reform is symbolized by very few rate slabs, ideally a two-rate structure. India&rsquo;s GST currently has 4 tax rates &ndash; 5%, 12%, 18% and 28%. And some specified goods and services are also zero or &lsquo;nil&rsquo; rated.&nbsp;</p><p>Add to this the ranging between 7% to 22% of GST charged on &lsquo;sin&rsquo; or &lsquo;demerit&rsquo; goods. Besides, a 3% GST is levied on Gold, a 0.25% GST on &lsquo;rough, uncut diamonds, and 1.5% GST on finished/polished diamonds, and the hotchpot of rates is filled to the brim.</p><p>The media recently reported that the GST Council is already working on a 2-tier rate structure. However, that proposition doesn&rsquo;t look like taking flight without facing considerable turbulence on the ground in the coming months.</p><p>Thus, as far as the report card on rates is concerned, India&rsquo;s GST is yet to pass the test of very few tax rates to qualify as tax reform.</p><h2><span style="font-size: 14pt;">Tax Litigation</span></h2><p>Now, let us come to the final litmus test of the steady decline of disputes after the introduction of the new levy. Typically, a levy will qualify as tax reform if disputes with Tax Authorities have reduced significantly over a three-year horizon.&nbsp;</p><p>Now, hold your breath &ndash; here are the statistics for tax disputes under GST for the first three years alone, categorised separately for matters in High Courts or the Supreme Court and those before the Advance Ruling Authorities or their Appellate Bodies:</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="" width="482" height="321" /></p><p>The list includes final orders, orders of remand, dismissal of Writ Petitions, etc.</p><p>Thus, in the first three years, the Courts had to hear over 1500 matters, and another few thousand applications/writs/appeals could have been pending to be heard then.</p><p>Summary of cases before AAR and its Appellate Authority</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="" width="514" height="137" /></p><p>Here again, you will find that nearly 1000 applicants approached the Authorities for Advance Rulings in the first three years of the levy. It is anyone&rsquo;s guess that these figures would have only gone northwards in the last couple of years, notwithstanding the brief interjection by the Covid-19 pandemic.</p><p>Also, since the only recourse against Appellate Advance Ruling Authority&rsquo;s order is a Writ Petition before the High Court, the burden of disputes on Courts is only burgeoning under GST with time.</p><p>A feasible remedy could be the constitution of GST Tribunals in every Indian State for efficacious and expeditious dispute settlement. However, even this aspect is mired in intriguing uncertainty if one considers the fact that the Supreme Court of India has directed the GST Council to ensure parity in the number of Judicial Members with the Technical Members in such a way that the interest of both the Federal Government as well as the respective State is safeguarded.</p><p>And this needs to be accomplished before January 1, 2023, possibly appearing more and more remote as days pass by. So, the Courts will not see any respite from GST disputes reaching their doorsteps, at least for another couple of years.</p><p>Now, let us look at some of the typical disputes in GST (that shouldn&rsquo;t have reached the Courts in the first place if the GST Authorities had demonstrated more empathy for the taxpayers struggling with transition issues and could have adopted a trust-based approach) and have been decided in favor of the taxpayers &ndash;</p><ul><li>Transitional Credits missed due to lapse of the due date</li></ul><p>In a landmark decision that could free up ITC worth hundreds of millions of Indian Rupees stuck in a dispute with the GST Authorities, the Supreme Court has allowed all affected taxpayers to claim accumulated ITC accrued in the pre-GST indirect tax regime within 60 days ending October 30, 2022.&nbsp;</p><p>The Court has directed the GSTN portal to make available the utility to enable all registered persons to claim transitional credit. With this judgment alone, the Supreme Court disposed off a batch of 400 appeals.&nbsp;</p><p>However, all such taxpayers, who could be in thousands, who may not have petitioned the Courts, could also now avail themselves of the benefit.</p><ul><li>The apathy of the GST statute towards goods and services consumed by the weaker or challenged sections of society</li></ul><p>India&rsquo;s Supreme Court recently termed the issue of levy of GST on mobility devices for people with disability as a "serious matter" and wondered how the court could break the "shackles of policy."</p><ul><li>No GST is attracted on ocean freight on a CIF basis, booked by overseas exporters</li></ul><p>Upholding the decision of the Gujarat High Court, against which the Revenue was in appeal before it, the Apex Court concurred that the chargeable section must be given a strict interpretation.&nbsp;</p><p>&ldquo;Article 265 of India&rsquo;s Constitution does not permit imposition of a levy by delegated legislation in the absence of express legislative provision. Thus, it is unconstitutional. Consequently, Revenue has erred in treating importers as the recipient of services as the foreign exporter receives the services.&nbsp;</p><p>The Indian importers were not even liable to pay consideration to the foreign shipping lines and hence, cannot be held liable to pay tax on such services. A beneficiary of services cannot be said to be a recipient of service. The mere fact that the transportation of goods terminates in India will not make such supply of transportation of goods as taking place in India.&rdquo;</p><ul><li>No GST on incidental charges recovered from customers along with electricity charges</li><li>Services provided to the parent company (separate legal entity) are export of services</li><li>Interest cannot be levied on Gross liability before adjusting ITC</li><li>Mere availing of ITC without utilization is not liable for interest</li></ul><p>&nbsp;</p><h2><span style="font-size: 14pt;">Summing Up</span></h2><p>So, we have seen from the preceding paragraphs how India&rsquo;s GST fails to meet the three-pronged requirements of tax reform in terms of a gradual reduction in tax collections over five years, gradual merging of multiple tax slabs to retain a maximum 2-3 tax rates and a significant decrease in tax disputes at all levels over the five years since the introduction of the levy.&nbsp;</p><p>Does it mean that this new levy is regressive or fares worse than its predecessors?&nbsp;</p><p>No Way! By no means are we implying that.&nbsp;</p><p>Of course, GST is one of the best things to have happened to India&rsquo;s fiscal environment for a long time. What we are only suggesting with tangible evidence for support is that India&rsquo;s GST could have been much more than what it is at present, and in that sense, the GST Council, the Constitutional body burdened with the thankless task of getting all things right on the levy, appears to have missed the bus, at least for now.&nbsp;</p><p>It is evident that political compulsions have overridden economic considerations and have relegated the 5-year-old levy merely as a new baby in the Value Added Tax family instead of being crowned as a harbinger of tax reforms.</p><p><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="">Shrikant Kamat</a>&nbsp;</em></span></p><p>&nbsp;</p><h3><span style="font-size: 18pt;">Frequently Asked Questions Answered by Shrikant Kamat</span></h3><h2><span style="font-size: 12pt;">1. <strong><span data-preserver-spaces="true">What is the future of GST?</span></strong></span></h2><p>GST in India is a value-added and destination-based consumption tax. Currently, real property, alcohol and petroleum products are out of its ambit, but over the next 5 - 7 years, these items too are expected to get covered. Then, GST will become a total indirect tax levied across all goods and services.</p><h2><span style="font-size: 12pt;">2. What effect does indirect tax have on society?</span></h2><p>Indirect Taxes are not a healthy way of taxation, and these do not take into account the inequalities in society. E.g. Biscuits are liable to GST, and every person buying a pack of biscuits has to bear the GST burden, whether she is rich or poor.</p><p>Therefore, in developed nations, the share of indirect taxes in the tax collections is less than that of direct taxes. Indirect taxes also have a trade-distorting effect as some businesses try to evade high taxation on goods or services by supplying them clandestinely. Therefore indirect tax rates should be low or at least reasonable and never high.</p><h2><span style="font-size: 12pt;">3. How does indirect tax affect economic growth?</span></h2><p>In a growing economy, it is always good to have a high collection of indirect taxes over direct taxes to help government mobilise revenue for big infrastructure investments. However, once the economy fairly stabilises, it is recommended to reduce the burden of indirect taxes and levy more and more taxes on higher income of individuals and business entities.</p><h2><span style="font-size: 12pt;">4. Is a high GDP good?</span></h2><p>High GDP is representative of high production, which may be a consequence of high demand. So, higher GDP signifies higher consumption of goods and services in the economy. However, a better barometer of a nation's growth can be its per-capita income instead of GDP.</p><h2><span style="font-size: 12pt;">5. Why is GST introduced?</span></h2><p>In India, GST was introduced because there were too many indirect taxes separately levied by the central government as well as by State Governments, and there was no input tax credit available for one against the other, thereby resulting in tax cascading and resultant price of goods and services increasing artificially without real addition to their value.</p><p>Therefore it was necessary to introduce a single value-added tax across the country with seamless fungibility of an input tax credit. That is why GST was conceptualised and introduced so that end consumers pay the accurate price for goods and services.</p><h2><span style="font-size: 12pt;">6. What are the causes of tax disputes?</span></h2><p>Traditionally, the value of goods and services and their classification are the two most important causes of tax disputes. Disputes arise because, typically, tax authorities would like to value goods or services higher as tax is levied at a specified rate on value/ price, especially in cases where the cost of goods or services is not listed or is not transparent.</p><p>Also, taxpayers typically try to classify goods or services in categories which attract a lower rate of tax, which the authorities may not agree to. Other causes of tax disputes are claims for exemptions, availability of input tax credits and failure to register or file periodic tax returns.</p><p>&nbsp;</p>
KR Expert - Dr. Shrikant Kamat

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