Goods and Service Tax (GST) is considered as India’s biggest tax reform. Subsuming multiple central and state taxes, GST was rolled out with much fanfare. With the popular slogan of ‘One Nation One Tax’, the Centre set out to achieve a unified tax regime for the entire country. The last three years have been more of a trial and error phase for the Government, with initial apprehensions giving way to the general acceptance that GST is still at its nascent stage.
While there is no denying that the Centre has been able to establish a unified system of tax, the efficiency of tax administration and success of the regime is yet to be determined. A reduction in compliance costs by subsuming several taxes and the enhancement in the spirit of cooperative federalism are some of the highlights of the regime. However, in the past three years, despite the achievements, several issues have crept up, both in the policy as well as in the procedural front.
One of the first obstacles in the implementation of GST was with regard to the absence of robust technical infrastructure in place. The lack of a proper technical infrastructure continues to plague the current tax structure. GST was rolled out on July 1, 2017, with many high ambitions without paying heed to the technical roadblocks that it might face in the future. Three years into the regime, technical glitches have been one of the major issues of dispute in the courts in India, with assesses unable to carry forward transitional credit in their electronic credit ledger. Although GST provided for a beneficial provision to taxpayers in the form of section 140 by allowing them to carry forward CENVAT credit of erstwhile taxes in their electronic ledger to GST, it was unable to meet its promises in an effective manner. The implementation of the provision was met with severe technical glitches with taxpayers knocking the doors of the courts for a solution. The issue of transitional credit has become one of the most litigated issues, thus raising the necessity for a proper technical infrastructure for GST. Along with transitional credit, the technical glitches in the implementation of the E-way bill system and the filing of refund applications on the online portal have created several woes for the taxpayers since its inception.
One of the dominant debates around the implementation of GST revolves around the Centre’s promise of reduction of cascading effect of tax and seamless flow of credit. The problem is two-fold. First, there are several instances where the GST is paid to the Government’s exchequer, however, the inefficiency in tax administration leads to denial of credit. Second, the provisions under the Central Goods and Service Tax, 2017 (CGST Act, 2017) are drafted in such a manner to block credit in the majority of transactions, thus defeating the very objective of GST. Section 17(5) under the CGST Act, 2017 provides for a list of goods and services on which input tax credit is not allowed.
The twin-problems in technical infrastructure and denial of input tax credit lead to another issue i.e. in the matching of invoices. One of the important aspects of GST is matching invoices, wherein a buyer is required to reconcile its tax payments on invoices with the tax collections, deposited, and reported by the supplier on the Government portal. Any incorrect or unmatched transaction would lead to denial of credit to the recipients. In the initial period, technical glitches prevented the suppliers and recipients from matching the invoices, thus leading to a denial of credit. Even though technical glitches have been reduced to a certain extent, yet the same has been the reason for loss/denial of credit under GST for quite a long time.
The exclusion of petroleum, natural gas, and alcohol industries from the net of GST has led to a working capital loss for these industries. These industries use several inputs and input services for the manufacture of their final products on which GST is being paid. However, the industries cannot claim an input tax credit of these inputs and input services under section 16 of the CGST Act, 2017 in as much as the final output product is excluded under the GST regime. There exists no mechanism under GST through which these industries can avail or utilize the input tax credit or claim a refund of the unutilized input tax credit, thus resulting in a working capital loss for the companies/industries. There have been several representations from the industry for resolution of this issue, however, no concrete solution has yet been put into place.
Another aspect of GST that needs attention is the establishment of a strong and effective appellate mechanism. As of present, the majority of the grievances of taxpayers are to be addressed in the form of writs to the High Courts or as applications before the Authority of Advance Ruling (AAR). The latter raises concerns in as much as the decisions of the AAR is binding only on the parties and has no precedential value on other taxpayers. Also, several contradictory decisions on the same issues have necessitated the establishment of a proper appellate mechanism. While the Central Government has agreed to establish GSTAT, the same has not yet been put into force due to the decision of Madras High Court in Revenue Bar Associations vs. UOI (W.P.No.26762 of 2019).
One of the major policy issues which have generated major attention during the pandemic is that od GST compensation cess. At the very initiation of GST, it was promised that the states will be provided with compensation cess to make up for the loss that the states might have to bear with the sudden change in the tax structure. However, even after three years, compensation cess has not yet been released by the Centre to the states, which had adverse consequences in the form of inadequate funds for the states to deal with the pandemic. The failure in releasing the compensation cess for the past three years not only raises questions on the current tax structure but also exposes the fissures in the fiscal federal structure of the country.
A robust and simplified-technology driven infrastructure is the need of the hour for fulfilling the objectives with which GST was unfurled in India. Release of compensation cess to states, seamless flow of credit in practice rather than on paper, the establishment of an appellate mechanism are certain areas to be looked into for an efficient system of tax administration. Lastly, a policy intervention will be helpful in providing for well-drafted and simplified GST law to reduce litigation.
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