Good & Simple Tax-A Myth or Reality?

It has been two months since the Goods and Service Tax (GST) has been in operation. Termed as the biggest reform in Indirect Taxes, GST has been showcased by the Government as a Good and Simple Tax. No doubt, conceptually GST is the good tax. However, the implementation and the complexity in the Indian variant of GST as detailed below, does not make this law either good or simple. The GSTN portal has not been able to cope with the pressure of filing returns by business entities and dates for filing of returns have had to be extended multiple times.

1. Multiplicity of Rates

Multiplicity of rates goes against the concept of a good and simple tax. Five rates of tax, one special rate for Gold and cess for certain goods is going to result in classification disputes. This would increase the load on the already overburdened judiciary with unnecessary litigation. Across the world there is no country where five rates of GST / VAT are in effect. But as always, our Government believes in making laws which are complex and cumbersome. The rationale behind bucketing of goods and services under various rates was that the new rate would be in line with the aggregate rate of VAT & Excise being levied under the erstwhile law. While for some commodities this has been possible but for many goods and for services the rates of tax have increased thereby raising the cost for the ultimate consumer.

2. Dual GST

The very concept of a dual GST, wherein the supplier of goods and services has to determine whether he has to levy CGST, SGST or IGST goes against the basis of ‘One Nation One Tax’. The present form of GST is not ‘One Nation One Tax’. It is One Nation but 29 taxes, as each State has its own law and credit for tax paid in one State cannot be claimed as credit in the other State. If the intent were to keep the law simple then there should not have been Dual GST in the first place. The Supplier would deposit the GST collected and the allocation or bifurcation of tax between the Centre and States would be done at the level of the Government as opposed to what is being expected out of the taxpayers today. Also, the input CGST cannot be used to set off the output SGST and vice-versa.

3. Blockage of Credit

As long as any Goods or Service are used for the purpose of business, the entity paying for such Goods and Service should be permitted to claim input credit in respect of taxes paid on receipt of such goods or service. In various cases however, the Government has expressly denied allowance for the input credit. This goes against the concept of seamless credit which is fundamental to GST. Further, the Government has also clarified that CGST of one State cannot be set off as an input against the output liability of CGST of another State. While, there is no express prohibition in the Act, the view therefore taken by the Government on this matter is strange. As long as taxes have been paid anywhere in India by an entity that entity should be allowed to take credit of the taxes paid subject to the condition that the Goods and Services are used for the purpose of business.

4. Complex Returns

The law in its present form expects tax payers to file invoice wise details while filing the returns under GST which would then be matched at an invoice level against the inputs of that payer resulting in differences for the tax payer to sort out in a given period of time. Under the existing indirect tax laws there was no requirement of invoice wise matching of credits. This requirement is cumbersome and unnecessary. This is a mammoth task leading to huge compliance cost for companies. This is clear example of the Government not trusting its tax payers and trying to procedurally complicate the law instead of making it simple for the tax payers. The lower the tax rates, the simpler the compliance mechanism higher will be the compliance by the tax payers.

5. Blockage of working capital

Implementation of GST has resulted in huge blockage of working capital especially for start-up or small exporters where furnishing of bond or payment of tax is mandatory before exporting.

I sincerely hope that the Government considers all the above aspects and actually makes GST truly a good and simple tax in letter and spirt for the tax payers.

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