Why Modi government's GST has hit a wall
Two-and-a-half months after its mega launch, the country’s most cherished tax reform Goods and Services Tax (GST) has hit the wall. With a lethal combination of a complex and ambiguous set of rules and dysfunctional GST Network, the GST has turned into an awful experience for Indian businesses.
GST authorities are also finding it difficult to implement it with a plethora of structural and compliance glitches already built in.
The warning signals of a potential GST breakdown had surfaced right before the nation's midnight "tryst with GST destiny" in the last week of June. While the government kept itself occupied with organising the grand spectacle of GST launch, businesses struggled with the irksome GST network for getting themselves registered under the new tax regime.
The politicos left over 85 lakhs Indian businesses to practice the Infinite Monkey Theorem (randomly striking keys of a computer keyboard to produce a desired result eventually) under their infuriating GST IT network and often-changing rules.
By mid-August, with the extension of GST return filing dates, it had become clear that the high-profile GSTN has let down India's most prized tax reform. However, it was the 21st meeting of the GST Council in Hyderabad last week where the skeletons tumbled out of the cupboard. The revenue-anxious states pulled up the GST implementation committee on the failure of GSTN and reportedly demanded a white paper on the GST mess.
Driven by the concerns over rising anger among the traders and a political backlash, the GST council constituted in no time a ministerial committee (headed by Bihar deputy CM Sushil Modi) to scrutinise the functioning of the GSTN. The council also extended the return filing date for July returns by a month till October 10, from the earlier prescribed date of September 10.
The GST, burdened with massive compliance prerequisites, real-time invoice matching, e-way bills and input tax credit, just can't work without an exceptionally robust IT network. The nation was misled repeatedly on the preparation GSTN. In fact, the final procedures of GST, approved only a week before its launch, were loaded on a naive network without proper trials.
The dysfunctional GSTN has virtually put the GST in a standstill and forced businesses to take recourse of informal channels of transactions, that is, without proper billing.
The nagging GSTN is not the only villain in the GST story. The frequent changes in tax rates have further thickened the plot. On July 18, the cigarette stocks bore the brunt of the anomaly in GST rate fixation. The tax rate and cess on cigarettes, fixed in May this year, was lower than the pre-GST tax incidence. This helped tobacco companies to reap a windfall and also pushed their shares sky-high. After realising the gaffe, however, the GST Council hiked cess on cigarettes which led the ITC stock to lose over Rs 45,000 crore in market cap in just a single day.
Cigarette was not the only case, the GST council has revised the tax rates on over three-dozen goods and services after GST launch. Mid-course changes and roll backs are only indicative of the lack of groundwork and poor preparation on the part of GST council and rates fitment committee.
As things stands today, not only has the GST lost the fervour of a reform but also has created an anti-climax on the following aspects.
1) With the delayed filing of returns, GST's so called infallible compliance and anti-tax escape model stands derailed. It has now become impossible for authorities to scrutinise the late returns and check the veracity of tax credits claims.
2) Complex rules and pesky GSTN has written an obituary of ease of doing business.
3) GST's malfunction may take a heavy toll on the revenues of Centre and states.
4) The extended GST transition will result in subdued economic activity and slow GDP growth eventually.
Unfortunately, the GST has become an uncanny reform which is now forced to go through a mid-course correction in its infancy.
1) The data requirements from assesses are exceptionally high and unrealistic under GST. This has turned into a nightmare both for businesses and network. The government has to drastically scale down the unnecessary compliance requirements to make GST workable.
2) A host of processes mandated under GST, including the much-hyped invoice matching, may have to go through a change or postponement.
3) Separate compliance rules are a must for small and big businesses so that juniors can survive under GST regime.
4) And last but not the least, no further changes in rules and rates till full implementation.
As I noted in a previous article in June, the GST has unleashed a chaos. The next three months are highly crucial for the success of India's most ambitious reform.
If the GST Network and authority fail to live up to the expectations, we may end up having an indirect tax system more or less similar to the existing one.