One year report card of India’s biggest tax reform

Large-scale implementation of Goods and Service Tax in the past one year has been nothing short of a mean feat. The completely new tax structure based on the edifice of digital compliance and unification of market came with its initial hiccups. But, with a continuous loop of feedback, a tide of teething issues has been resolved.

It is no wonder that within one year, the system has stabilised to provide enough boost to tax returns, cause a reduction in prices as well as smoothened an otherwise cumbersome convoluted tax system that had held back the potential of the economy up until now.

The government has been proactive in taking feedback from ground level and bringing changes in real time. As per Export Promotion Council for EOUs & SEZs (EPCES), the government made 376 changes in the Goods and Services Tax (GST) in the first 10 months of its inception in July 2017.

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Another example of government being hands-on with the inputs coming from the ground could be seen from withdrawal and re-introduction of e-way bills within two months on April 1, 2018. In the first 24 days of its functioning, over 2 crore e-way bills were generated for the movement of goods, highlighting its smooth execution.

GST arrived as an idea whose time had come. The path to roll out GST was laden with challenges. It required consensus among state and centre and a number of stakeholders. However, the foundation of a transformative step in the direction of national growth was placed on the strong ideals of cooperative federalism.

There were steps taken to assuage the concerns of the states, who were assured that their development needs will not be compromised or sidelined. In order to demonstrate the trust Centre had in states, the share of central taxes was increased to 42 per cent from 32 per cent, which enhanced every state’s financial autonomy. Despite, political opposition, each party went beyond political exigencies to create an atmosphere of trust and camaraderie for the long-term interest of the nation.

Despite the teething delays arising in implementing a mammoth sized change, the figures provided by the Finance Ministry indicate that the Gross GST revenue in April crossed Rs 1 lakh crore, against a monthly average of Rs 90,000 crore in the July-March period last year. Of the total revenue, central GST was Rs 18,652 crore, state GST was Rs 25,704 crore and integrated GST Rs 50,548 crore, including Rs 21,246 crore collected on imports.

As per Economic Survey 2017-18, there has been a 50 percent increase in the number of indirect taxpayers, besides a large increase in voluntary registrations.

There have been compliance issues with small businesses who may not be able to hire consultants to ease into the new system. However, regular seminars and consultations with experts would be helpful in ensuring that they adopt the system without hassle.

Other than that, under GST the small traders, manufacturers, service providers with an annual turnover below Rs, 20 Lakh have been exempted from paying GST, thus receiving huge relief. In the VAT regime, the same limit stood at Rs. 10 lakh annually. In this year’s budget, the government introduced a bonanza for small and medium-sized businesses by reducing the corporate tax to 25% from 30% for companies with a turnover of Rs 250 crore. This has further strengthened India’s small and medium industries.

The compliance has been further incentivised with invoice matching under the GST. The input tax credit of purchased goods and services has been made available only if the inward supply details filed in buyer’s GSTR-2 return match outward supply details filed in supplier’s GSTR-1 return. If the two do not match, the incentive of input tax credit would not be provided on the purchased goods and services. The digital platform has helped in not only reducing the stimulus to cheat the system but has minimised the time lag in identifying any mismatch in the purchase and sale bills. It has also been beneficial for businesses that would now be able to avoid legal disputes that arise later when purchase and sale bills fail to match.

It is not just the industry that has benefitted from the new tax regime with subsuming of almost 15 indirect taxes falling under central, state and local bodies, mitigation of cascading/double taxation and creation of a common national market, but the end user has reaped the benefits of GST with a reduction in prices. Contrary to earlier belief, GST has been far from inflationary.

Under the previous tax regime, producers had to pay taxes at every stage which was added to the final selling price. This was called cascading effect of taxes. This extra tax levied on a commodity eventually added to inflation and the rise in prices was borne by the customer. Now, GST replaces the cascading effect of taxes with input tax credit. Under the new tax regime, the tax paid for inputs is taken off taxes to be paid for the final product, or output. The benefit of input tax credit has been mandated to be passed on to the end consumer.

Further, the prices of essential commodities have been kept in the zero percent tax bracket under GST. Some of the examples are as follows:

  • Economy class air travel has become cheaper with tax rate fixed at 5 per cent against the previous 6 per cent under the GST.

 

  • No tax on healthcare and education under GST.

 

  • Prices of food grains, especially wheat and rice have come down as they are kept exempt from the GST.

 

  • Electricity generation gets cheaper as the GST council has brought down the previous tax on coal to 5 per cent from 11.69 per cent.

 

  • Household items like sugar, tea, coffee (barring instant coffee) and edible are under the lowest tax rate of 5 per cent.

 

  • Common use products like hair oil, soaps and toothpaste are being charged with a single national sales tax or GST of 18 per cent instead of previous 22-24 per cent tax.

 

  • Railways: Non- AC train travel, including in local trains and metro, has been exempt from GST, while AC train travel is charged at 5 per cent tax rate.

 

  • Eating out got cheaper with GST rate on restaurants slashed to 5% for all restaurants except those in the category of five-star hotels where the tax rate remains 18%.

 

  • Prices of packaged cement further went down from 28 per cent to 18 per cent as against 31 per cent previously on account of different indirect taxes.

 

  • Footwear below Rs. 500 has got much cheaper as under GST it is taxed at 5% as against 14.41% previously.

 

  • Basic food items like milk, paneer, curd, cereals, eggs and meat have been exempted.

The fact that the GST did not lead to inflation is again unprecedented, considering that the other countries such as Australia, Malaysia, and Singapore, where it was implemented, saw a rise in inflation.

Other than the points above the GST has been instrumental in reducing corruption as well as causing seamless economic integration. It has been the most transformative tax reform ever that has made India a single market and increased ease of doing business. The scale of the entire activity has been unprecedented world over. In one go, we have unified an economy of over $2 trillion with more than 1.25 billion people into a single market. From small to big traders, all have been brought under the ambit of GST, creating a uniform system that promotes equality and values honesty.

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