GST: Why government has made it so complicated
Why is all of India flummoxed about its tryst with GST destiny? The answer is simple. Reforms are expected to simplify the life while the GST is quite ostensibly doing the opposite.
Unlike demonetisation, which exploded in our faces out of the blue, the GST has been brewing for over 16 years, yet it has failed to merit accolades from any of the stakeholders — producers/traders and consumers. So why has the GST failed to assure a simple and hassle-free taxation system? Before I answer, let me explain one feature that completely stands out under GST.
The system of input tax credit is being hailed as the bedrock of GST reform. It is the tax refund on the portion of final cost of goods and services, which one has already paid. This mechanism needed some basic yet critical reforms in the consumption (goods and services) taxation. However, its implementation over the non-reformed structure of multiple tax rates has turned GST into a labyrinth of compliances without tangible benefits to the stakeholders.
Why are the tax rates reform crucial
All around the world, the GST has a similar concept of having a destination-based single rate tax structure on the consumption of goods and services. Apart from India, Canada is the only country where they have the concept of dual GST.
In Canada, GST met with strong opposition at the time of introduction, which forced the government to reduce GST rates a couple of times post implementation. In India, even after subsuming a few state taxes and central levies, the GST still maintains three layers (CGST-IGST-SGST) and six slabs of taxation, (0 per cent, 3 per cent-Gold, 5,12,18,28 and 40 per cent-fuels) while keeping taxes on electricity and real estate out of its ambit. This has made GST more complex than the existing indirect tax set-up.
Moreover, the system of taxing different variants of a single product under various tax rates is simply bizarre. For example pastries, sweet biscuits and cakes attract 6 per cent excise duty, but those containing chocolate or having a chocolate coating, will attract 12.5 per cent tax.
GST has applied the same formula on shoes and garments. Footwear below Rs 500 will be taxed at 5 per cent, while the rest would be in the 18 per cent bracket once the new regime is rolled out. Similarly, cotton, yarn and ready-made garments below Rs 1,000 mark will be taxed at 5 per cent for yarn and cotton, while garments above Rs 1,000 will attract 12 per cent GST.
The GST council has not only pampered the anomaly of multiple rates on goods, it has also extended them to the services which has successfully operated under single-rate structure until now. With four slabs of tax on services and tariff-based tax on hotel industry, classification of services has become equally cumbersome under GST.
It is essential to fix one rate on one product as GST covers the entire value chain of the product. Taxing various variants of one product on different rates, produced in same factory with similar raw material and labour, is simply ridiculous.
In a growing consumer economy like India, the industry can't survive without quick innovations and diversifications in product's profile as per changing demands of markets. India seriously lacks product innovations owing to the complicated tax structure.
With multiple rates, GST will limit the scope of product improvisation and likely to force the industry to stay on course with invoice fudging through digital mediums.
India is a jungle of classification disputes under excise duty set-up. The contradictions under GST may keep them galore.
A modern tax system must not trigger unhealthy bias towards cheaper products through price-based taxation. It should rather prescribe one tax rate on one product to motivate consumers to opt for high-quality value-added products with better value for money.
The GST council could have worked out a practical list of exempted products instead of putting different variants of one product under differential duty structure.
The second most important reform which the GST lacks is an administrative one. Digitisation is not new to the tax system, but it cannot work without toning down the bureaucratic discretion. Since there is no rates reform, taxmen are likely to keep milking businesses with ever-rising classification disputes.
Why is GST so intricate?
The input tax credit is a boon of GST, which prevents inflation driven by cascading taxation. However, the biggest merit of GST has actually turned into its biggest nightmare. GST is complex because producers and service providers have to claim the input tax credit going through the maze of various slabs, rates, and classifications.
The invoice-to-invoice matching system of GST essentially requires multiple monthly returns and plethora of audits to claim the input tax credit. The invoice matching is good to plug tax leakages, however without one-product-one-tax, it may keep bureaucratic interventions relevant and growing. This is the utter anti-climax of GST.
We must not forget that the GST regime will place the small and medium enterprises (SMEs) on the same footing as large-scale ones. There will be lower exemption threshold for SMEs, while compliance rules will be similar in both. The micro and small sector, enjoying excise duty exemption up to Rs 1.5 crore shall be heavily impacted as the registration threshold has been brought down to Rs 20 lakh. This will require SMEs to drastically change the way they operate under limited resources.
Precisely going by the large and small mix of its economy, Malaysia had provided 1.5 years for GST preparedness. However, India seems to be hurrying unrealistically. With highly perplexed stakeholders and unprepared GST network — the world's third largest economy's rendezvous with GST runs the risk of being chaotic before it delivers desired results.