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Experience With GST

Experience With GST

In less than two months, Goods and Service Tax (GST) will be a year old. Or, should it be put differently? In the coming 45 days, we shall witness another mela showcasing the achievements the government has made ever since GST was implemented.

Already this writer has been receiving emails from various marketing agencies exaggerating the Modi government’s achievements. Some boasting about his recent visit to Karnataka and sharing highlights of his speeches while some praising Mann ki Baat and so on. And many of you must also be receiving similar letters, that too without subscribing to such emails or newsletters. How did you start receiving these emails? The answer is obvious. If Aadhar data is not safe, so is your email id.

Anyway, one email that evoked attention stated that over the last nine months, the government has collected Rs. 7.19 lakh crore as GST. Another email came within a few minutes of the previous one giving another data. “GST collection rose to Rs. 1 lakh crore for the month of April 2018, compared to an average of around Rs. 89,000 crore”, it said.

While it might have given a little solace to the finance minister, who had gone overboard for getting GST implemented in a jiffy, experts say that there is nothing much to be overjoyed about. The collections in the month of April largely imply a higher turnover in the month of March, which is usual and obvious.

On the contrary, a report by a stock broking firm Nomura says that if collection of indirect tax over the last few years is studied, it would be found that the collection in March tend to be almost double the collection during the previous two months. Given this fact and the old trends, the collection of Rs. 1 lakh crore is slightly lower. Nor does it imply that the economic activity has suddenly picked up in one month and will consistently increase in the coming months as well.

However, considering the fact that the finance minister had fixed a target of Rs. 7.44 trillion for the current financial year from GST alone, the average monthly tax collection,  the report suggests, should be close to Rs. 1 lakh crore, instead of Rs. 88,000 crore last year. This requires better compliance rate and also a considerable increase in the economic activity i.e., higher GDP and a higher tax buoyancy rate. Simply put, the rate at which the tax revenues increase should be higher than the rate at which the GDP increases. This certainly does not seem to be an easy job.

In case the government wants to increase the tax buoyancy rate, it has to simplify the tax collection and take measures to increase the GDP. The government seems to have taken this advice way too seriously if the recent decisions taken by the GST Council are anything to go by.

While some important issues were resolved, there was a fair amount of disagreement amongst the members on other issues. The biggest take-away from the meeting is its decision to reduce the number of returns that were required to file. Against the present practice of filing 37 returns – three returns in a month and one annual return — the new system will require filing of only one return in a month.

Although it will take around three to six months for the changes to take place, it is a respite for everyone. However, the system of getting provisional input credit will no longer be there. Going forward, the buyer will get input credit only after the seller uploads the invoice. Initially, there will be a possibility of a cash-flow crunch, but it will gradually become a smooth affair.

However, the biggest issue that raised alarm bells was the discussion about introduction of a cess on sugar! The proposal was mooted by the finance minister and was seconded by the representatives from Uttar Pradesh, Maharashtra and Bihar, the states with the highest production of sugar and, incidentally, the ones where the BJP is in power.

Since sugar production is the highest in these states, these states will benefit the maximum, if the proposal is accepted. The argument behind introduction of cess was that the cost of sugar production is more than Rs. 35 per kg while the selling price is between Rs. 26 and Rs. 28 per kg. As there is a huge gap between the cost price and the selling price, sugar mill owners are not in a position to pay cane arrears to farmers in these states. And introduction of cess will help in getting more revenue to ease the situation.

The proposal was opposed by other states which asked why a proposal that benefited only a few states should be passed. On second thought, we are in general paying Rs. 40 to Rs. 45 per kg of sugar. Where does this price of Rs. 26 to Rs. 28 a kg exist?

Be that as it may, the meeting ended with a recommendation for setting up of a Group of Ministers from State Governments to look into the proposal and make recommendations, within two weeks.

It is a fact that the country is actually passing through a bad phase as far as agriculture is concerned. But imposing a cess over and above GST, which was sold with a tagline – one nation one tax – is not a solution. Instead, it will further complicate the tax structure. Yes, it will improve the tax buoyancy rate as far as sugar is concerned, but will open channels for other politicians and states for similar relief packages. And it seems to be a possibility as these techniques could be used to pacify the less-privileged people, especially farmers in the upcoming Lok Sabha elections. And GST would become yet another tax, with twists and turns and more complexities.

India’s biggest tax reform has already been labelled as the most complex by the World Bank in its recent report. The report says, “ The Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28 percent)... Most countries around the world have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only five countries, including India, use four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST rates in the world."

It also points out that in comparison to other countries, the tax rates in India’s GST system are among the highest in the world. Not only this, 28 per cent is the second highest GST rate in the world! At a time, when the government should think of reducing GST and the number of tax slabs to bring it at par with other countries, imposing another cess will dilute the very idea of having a simple tax. And this certainly does not promote ease of business as the government has been trying to do over the last few years to attract foreign investors.

Besides, sugar crisis is not a natural calamity that the government should compensate with a magic wand, by imposing cess. It is self-inflicted and largely motivated by vote-hungry politicians, who recommend very high state-advised prices to woo the famers, without making adjustments in tariff policies. The government should think of increasing economic activity rather than just improving the tax collections. Moreover, why should the entire nation suffer with an extra tax, just to help farmers, for only one crop?

Hope the group of ministers take a wise decision and throw Jaitley’s proposal into the waste basket.

(The writer is a company secretary and can be reached at )

(Published on 14th May 2018, Volume XXX, Issue 20)