A vote for cooperative federalism (GS Paper 3, Economy)
Context:
The Goods and Services Tax reform is completing six years, and has now become an insignia for India’s cooperative federalism, making the Union and state governments equal stakeholders.
Structural changes catalysed by the tax reform are already visible. Now to iron out the kinks that remain, such as the anti-profiteering provision.
Details:
The Goods and Services Tax is labelled as one of India’s boldest fiscal transformational reforms in the post-liberalisation era. GST started with a shaky implementation primarily due to technical issues faced by the GST portal.
The transitional credit provision allowing taxpayers to carry forward Central Value Added Tax (CENVAT) credit to the input tax credit system was ridden with practical hardship due to technical glitches on the common portal.
However, over the years, there has been a marked improvement in the functioning of the GST portal, leading to improved compliance. The robust IT infrastructure introduced the Goods and Service Tax Network (GSTN).
It has not only broadened the tax base but also made tax compliance easier with a user-friendly interface. The in-built mechanisms in the design of GST incentivise tax compliance in the form of the input tax credit.
Technology-driven:
As a fiscal legislation, it has achieved the merger of multiple taxes, reduced the cascading impact of erstwhile taxes, and implemented a technology-driven tax system.
Contrary to the earlier structure, tax technology is at the core of GST, as all processes, from application for registration to filing of returns, filing of refund claims, tax payments and so on have been automated. The technology-driven compliant system of the network is a clear uplift for the business confidence index.
It has a multiplier effect since it compliments reporting and compliance under the direct tax, which in the past few years has witnessed record tax collection.
The trend of GST collections, particularly in post-Covid times, is a mere indication of rich dividends (to the Centre and states) through increased GST collection and compliant taxpayers.
Tax evasion:
Multiple mechanisms in the regime focus on weeding out tax evasion, which remains an important public policy stance.
The Directorate General of Analytics and Risk Management (DGARM), established under the CBIC, was set up (in 2017) to impart intelligence inputs and undertake data analytics to curb tax evasion and for better policy formulation.
Furthermore, field officials deploy data analytics, such as business intelligence tools and ‘end-to-end’ analytics for the sector as well as ‘gap analysis’ of the taxes paid in a supply chain to figure out if GST is paid throughout the entire supply chain. They then identify missing links, if any.
Such tools have aided the detection of evasion and recovery to the tune of over Rs 1 trillion in the past five years and are proving to be successful for revenue mobilisation.
The collection trends are also indicative of how the economy is rapidly moving towards formalisation, which is likely to have a trickle-down effect by way of an increased collection of income tax as well as other taxes.
Issues:
There are other identifiable areas that need improvement. For instance, the revenue neutrality of GST must be restored as multiple changes in rate structures have compromised it. GST rate rationalisation will help in further simplifying the GST rate structure.
Additionally, petroleum products are outside the purview of GST, resulting in a cascading effect of taxes hiking up the effective tax and impacting transaction costs.
Similarly, immovable property, which is considered to be a supply of neither goods nor services, also has an impact on transaction cost, and such transactions should be included within the purview of GST. Consequently, availing of input credits on such transactions is barred, creating impediments to the seamless flow of credit.
Faceless assessment is another reform that has shown positive results for income-tax assessments and may prove to be a useful reform for expediting GST assessments.
Further, the Anti-Profiteering provisions in GST law are another area of concern, leading to several unresolved interpretation issues, languishing before the courts. A policy statement and intent to end the cases are advisable.
Conclusion:
Though six years is still too early to judge the efficacy of GST reform, given the early gains it has brought to the economy, the structural changes are visible.
The establishment of the GST Council as a joint forum examining issues, making recommendations, and guiding both the Union and state governments has been path-breaking. It has been taking proactive steps to address the problems faced by the industry, which shows the determination of the policymakers to pursue the spirit of cooperative federalism.
The industry anticipates that the unfinished reform agenda will be addressed. At the same time, considering the developments and visible changes in the indirect tax structure, there is no doubt that the implementation of GST has been a success.
