17 Jan 2018 15:04 IST

Five smart steps to a better GST regime

It’s not only software, but rules and forms, rates and thresholds that need to be rehauled

With the issuance of one crore GST Identification Numbers (GSTIN), the goods and services tax has become world’s most extensive tax system. In the last six months, the GST Council has lowered rates for many products, extended deadlines for filing of returns, and introduced an exemption system for exports. All these changes were demanded by domestic businesses. These are sure signs of an open and receptive government.

However, the GST remains a work-in-progress despite introducing many positives to doing business in India. Some corrections in five key areas will make it more inclusive and efficient.

Of errors and limits

1. Make GSTN fully functional. In the beginning, everything GST was to be online through the GST Network (GSTN). Firms were to file periodic online returns, pay GST and be done away with it. But as the GSTN is still not fully functional, manual processes crept in to keep the business going. Even the most central feature of GST, invoice matching or the matching of information provided by the buyer and seller, could not take off. So, even though a seller has paid the full price to the buyer, she has no means of knowing if the buyer has paid GST to the Government.

In any future dispute, she will have to refund the tax money to the Government with interest for no fault of her. The idea of matching a large number of invoices at the product level, and integrating large, complicated forms into the system is proving too ambitious and needs a quick rethink.

Come February, GSTN will also be required to generate eWay bills for movement of goods of value more than ₹50,000 beyond 10 km. The supplier and the trucker will have to pre-upload the details on the GSTN. Error-free GSTN is a precondition to issuing eWay bills on time. Any delay will stop the movement of trucks and the business.

2. Raise the GST exemption limit from the current ₹20 lakh to ₹1 crore. Today, a shop owner selling goods of value ₹2 lakh a month earns ₹20,000 at 10 per cent profit. Can we imagine him filing 37 returns online every year?

With the raising of the GST exemption limit, the Government will not lose even 5 per cent of the revenue. Consider this: The top 10,000 firms effect 90 per cent of India’s exports, pay 95 per cent of central excise (pre-GST), and 90 per cent customs duties. Similarly, the most GST is paid by a few thousand firms.

The GST rules should also allow small unregistered firms to export and sell in other States, on the e-commerce websites. These steps will help small and informal businesses which create 90 per cent of the jobs, flourish and transition to the formal sector. The taxes paid by these firms in buying the inputs will remain with the Government as they do not get Input Tax Credit. The low number of businesses will also reduce the load on GSTN and tax administration.

Rates, exports and import parity

3. Simplify rates. Most products fall under five GST rates (in per cent): 0, 5, 12, 18 and 28. These rates represent the taxes charged on a product pre-GST. Reducing the number of rate categories will make tax administration easy, but revenue pressure may not allow this to happen immediately.

But we can go easy on a large number of items with negligible revenue implications. Past VAT and central excise, and current GST data will identify such items.

4. Exempt exports from payment of GST or automate refund process. The Government collects GST from exporters only to refund it later. This is because GST is a tax on domestic consumption while exports go out of the country. The GST refund process blocks exporters’ money for a long time and affects their competitiveness.

The Government promised to refund 90 per cent of the money within seven days of making an application after export. But this did not happen.

Most exporters have not received refunds of the taxes paid due to the complicated application process, confusion in refund calculation criteria and lack of awareness at the field level. Improvements would need a better functioning GSTN and clear refund guidelines.

5. Import parity. GST has made imports cheaper for products where the tax on finished goods is lower than the tax on raw materials. For example, GST on yarn is 12 per cent while GST on its raw material fibre is 18 per cent.

In such cases, the domestic manufacturer is not able to use the excess credit and add this to the price of yarn. As a result, the effective GST rate on yarn increases from 12 per cent to 14 per cent for domestic sale. For imports it remains 12 per cent, making imports cheap.

An increase in the Basic Customs Duty for such products will allow local manufacturers to enjoy the same level of protection from imports that existed pre-GST.

Way to go

The GST rules, laws and rates are in place and operational. Replacing 17 Central and State taxes and 35 tax administrations with one GST and one tax administration across the country was no mean feat. It is facilitating large-scale tax collection. During July-Nov 2017, 53 lakh entities filed 3.5 crore returns and paid GST of ₹4.4 lakh crore.

But like any system of this size and complexity, it needs constant improvements. Without 100 per cent online GST operations, the vices of the earlier system will return.

But software persons alone cannot get us there. We also need to revisit the rules and forms, rates and thresholds.

Addressing these five concerns will cut operational cost, reduce GSTN’s load and help small firms.

(The writer is an Indian Trade Service officer. The views are personal. The article first appeared in The Hindu BusinessLine.)