It has been more than 2 years since the GST legislation was introduced in India. Over the period of two years numerous changes have been made to the law by issuance of various circulars/notifications. GST which was to be a “Good and Simple Tax” is becoming a complex piece of legislation consuming precious manhours in order to ensure compliance that has been thrust upon the taxpayers.
In my view, ten steps which the legislators should urgently consider making the law simple are –
- One nation one tax
GST law was introduced by proclaiming it to be one nation one tax. This concept is a misnomer. The current legislation is far from being one nation one tax. If it were then why should there be an embargo on adjusting input tax paid in one state with the output tax of another state. Therefore, there are as many taxes as there are number of States and UT’s, (37 to be precise), credit for which cannot be claimed by a taxpayer in another State. This artificial barrier must be removed in order to make business simple and cost effective.
Due to the dual structure of GST, businesses are forced to set up offices in other state to claim credit of the input tax paid. This is then re-invoiced basis the cross-charge mechanism. There is ongoing litigation just to decide whether the entity has to pay IGST or CGST & SGST. The moot question here is that why should business not be allowed to freely carry on the activities without grappling with these location issues? If a Company has to litigate to know which tax it has to pay i.e. whether IGST or CGST & SGST then it is a failure of the law.
- Multiple rates
One of the drawbacks of the GST law is the multiple rate system. This not only makes the law cumbersome but prone to litigation. Selling a product in loose quantity vis-a-vis in a packed condition or as part of a goodie bag attracts different rates of tax. This distinction should stop. The judiciary is already burdened with pending cases and multiplicity of rates will only add to further litigation.
- Frequent changes
One of the basic principles of fiscal legislation is that the law should be simple for the taxpayers to understand and follow. Since 1stJuly, 2017, the time when GST was enacted, innumerable notifications and circulars have been issued under the GST law which in itself proves that the law as conceptualized is far from being simple. A complete overhaul of the law is required.
- Complex returns
The whole scheme of the formats of the returns under GST law is based on the premise that all taxpayers are dishonest and therefore maximum information should be sought from the taxpayers in the return. The annual return for 2017-18 which was supposed to be filed by December 2018 has seen multiple extensions. Information is being sought in the return which was never indicated to the taxpayer under the law and therefore taxpayers are struggling to fill the format of the return and give the required data. Precious manhours in the country have been lost which is very unfortunate as these manhours should be used in something which is far more productive and not merely wasted for reconciling data.
- Matching concept
The GST law in its current form envisages a matching concept whereby output of one person has to be matched with the input of the other person. This matching makes the law extremely complicated. Under the Income Tax law also, there is a matching concept i.e., a taxpayer is given credit of the tax deducted at source only if the TDS is reflected in his form 26AS. This exercise is, however restricted to interest, rental and other contractual/service income. The main activity of purchase and sale of goods is outside the scope of TDS and therefore it is easy to match the 26AS to claim credit of TDS. However, GST being applicable for almost all goods and services a taxpayer is supposed to reconcile the entire debit side of his/her statement of profit and loss with the output of multiple vendors with which he does business. This is a mammoth task which again uses precious manhours just to reconcile data. This brings me to the point raised earlier, that the Government presumes that all taxpayers are dishonest and that is why this requirement to reconcile the auto populated GST 2A with the input credit claimed.
- Deeming fiction
Under the law there is a concept of place of supply which in-turn determines the tax that is supposed to be charged i.e. IGST or CGST/SGST. For various types of situation, the law deems a ‘particular place’ to be the ‘place of supply’ for levying tax. As a result of which tax is sought to be levied when in effect no tax ought to be paid. The case in point here is “intermediary services”. The intermediary renders services to a foreign principal and earns money in convertible foreign exchange yet he is liable to pay tax. This is against the general rule wherein place of supply is deemed to be the place of the recipient. Such instances are forcing businesses to relocate abroad to remain cost-effective.
- Seamless credit
One of the features of the GST law is the flow of seamless credit across the value-chain. However, there are multiple situations artificially created in the law which deny the credit to the recipient of the goods/service even though the goods/services are utilized for the furtherance of business. One example which comes to mind is of the input credit of hotel accommodation expenses in a state where the taxpayer is not registered, though has business activity. Therefore, this restriction should be removed, and free flow of credit should be allowed.
- Reverse charge
The concept of reverse charge for payments to unregistered dealers, which has temporarily been suspended should be deleted permanently. This only adds to the compliance burden as a registered person has to first raise a self-invoice, pay the tax and then claim input credit. This will force businesses to stop dealing with small vendors who will be then out of business.
- High rates of tax
Higher the rates of tax, higher is the non-compliance. India is already a highly taxed and compliance driven economy and the high rates in GST are hurting the economy far from doing any good. Many items are deemed to be a luxury and are being taxed at 28% whereas they are a necessity.
- Other miscellaneous issues
Keeping certain products outside the GST law not only goes against the concept of seamless credit which is the backbone of the GST law but creates complications for the taxpayers. There are certain products which are still subject to VAT under the respective state laws as against GST. Further the law envisages a peculiar situation where a supplier of goods/service is liable to pay tax on the supply even though the customer does not pay, and the debt eventually goes “bad”. This is a double whammy for the taxpayers and needs to be addressed.
Simpler the law is, higher will be voluntary compliance. In its present form the GST law is complex and is not a simple tax as proclaimed by the Government. This will increase litigation and will use precious manhours for unproductive activities, which the country cannot afford to. If we have to realize the dream of our Hon’ble Prime Minister of making India a five trillion-dollar economy, then amongst other action points, an overhaul of the GST law should be on the top of the list.