PIECING IT TOGETHER
THE GST BANDWAGON HAS HAD A CHOPPY RIDE IN THE FIRST YEAR BUT IS GAINING MOMENTUM. FURTHER FINE-TUNING OF THE GST LAW HOLDS KEY TO FUTURE SUCCESS
BAHADURKE ROAD, a bustling street in Ludhiana houses over 250 hosiery units and a handful of oil mills. Top Gear Fashions, a manufacturer and exporter of garments is among the bigger units housed there. Anup Jain, partner, Top Gear is happy that GST has been implemented because many unscrupulous promoters and businesses were avoiding paying taxes. GST has the mechanism to plug loopholes, he says.
But he rues the fact that government has gone easy after sending strong signals that they wanted to get tax avoiders. “In the first couple of months, everyone sent consignments with proper bills. Then they realised that the government has relaxed its vigil and are going easy. Immediately, people who are used to fraudulent ways were back with a vengeance,” he says. Underinvoicing says Jain is rampant and the ‘cash’ business is back in major wholesale markets. The kaccha bill is very much in business.
In New Delhi, Rajat Mohan, partner at chartered accounting firm, AMRG & Associates is piqued that though GST was supposed to be governed online, many processes were still happening manually. “Refunds are getting stuck because GST Network or GSTN, the custodian of the IT backbone of GST has not developed a particular utility,” he says.
Meanwhile in the corridors of North Block, home to the finance ministry, while the government is boasting about growing monthly collections, officials are wary about tax buoyancy due to GST.
This pretty much sums up GST, which completed a year on June 30. The new tax regime is in place, in bits and pieces, but the soul is missing. The software and IT
backbone is still struggling to cope with the enormity of processes. Tax officers in states as well as taxpayers are yet to fully get the hang of the new law. Also, frequent changes in the law and tax rates are making life difficult for everyone. To compensate, the government has been going slow on enforcing it. Tax collections are picking up, but are far from what the government budgeted for. However, the number of taxpayers has gone up and compliance is improving.
Over the last year, GST is not a story of only failures or under-achievements. It is a mixed-bag of many failures and some successes – much of which we discuss here. But let’s start with the failures.
Under- prepared IT infrastructure
One of the biggest failures of GST in the first year has been the under-preparedness of the IT system, which resulted in the government extending deadlines for filing returns and payment of taxes, delaying many other processes vital for the smooth functioning of GST. The matching system, the soul of GST, is yet some time away from getting started.
The E-Way bill had a false start on 1 February, when the government, realising that the system was unable to take the load, had to suspend the law governing movement of goods across states by another couple of months. The refund mechanism is also in a mess partly due to the faulty IT system which has not developed some applications. Exporters are the worst sufferers of the delay in refunds.
Many other anti-evasion measures like reverse charge mechanism, Tax Collected at Source (TCS) and Tax Deducted at Source (TDS) are being postponed for some time now, increasing uncertainty for taxpayers. Anita Rastogi, partner, PwC says the government should come out and state that it is postponing some of these measures for the next two years. “The postpone-
“A SINGLE SLAB GST CAN FUNCTION ONLY IN THOSE COUNTRIES WHERE THE ENTIRE POPULATION HAS A SIMILAR AND A HIGHER LEVEL OF PAYING CAPACITY. THE POPULATION PROFILE OF A STATE LIKE SINGAPORE AND INDIA IS VERY DIFFERENT” Arun Jaitley Finance Minister
ment by two to three months are only creating confusion for companies who need to change their ERP and other software if they have to comply with rules like reverse charge mechanism,” says Anita.
Revenue Secretary Hasmukh Adhia explains the reason for the continued postponement of some of these provisions. “We can start TCS and TDS. But after deducting money from say a contractor in the government department, if there is no bridge between the government accounting and the GSTN accounting, the money would not be credited to his account. Then there will be a problem. So we have to ensure that the software is created that acts as bridge between the government accounting and the GSTN accounting,” says the revenue secretary.
However, some experts are ready to give the benefit of doubt to GSTN. “Given the enormity of change, it is natural to have some glitches. But in the last six months, the GST R1 and GSTR 3B are working smoothly,” says Harishanker Subramaniam, Tax Partner & National Leader, EY India, which is also one of the biggest GST Suvidha Providers. Of course, part of the blame for poor show of the IT system should go to frequent changes in the law and tax rates.
Frequent changes have unsettled the system in more ways than one. There have been more than 400 notifications, over 100 circulars and FAQs issued so far by the Central Board of Indirect Taxes and Customs (CBIC). Already new rate categories have been carved out, products and services have been moved from one tax bucket to another, the list under 28 per cent tax bracket has been pruned drastically.
Refund Mechanism Mess
Exporters are bearing the brunt of the faulty refund mechanism which has hit many businesses. Recently, after a hue and cry over the delay in refunds – the Federation of Indian Export Organisation (FIEO) had estimated 20,000 crore was stuck due to various delays – the government announced two special refund fortnights, one each in April and June.
Dr Ajay Sahai, director general and CEO, FIEO explains the travails of exporters. “More than 10,000 crore may be stuck due to software challenges and there are exporters who have been waiting for last 12 months for refunds,’ he says adding that if an exporter is unable to file his claim due to non-modification of the software, he should not suffer because of this.
Refund delays were leading to working capital problems for small and medium exporters. “These exporters hardly have resources to pay taxes out of their pocket when they are borrowing from banks to pay the government,” he says. He states that refund of Input Tax Credit has a partly manual interface which not only delays the process but also adds to physical transaction costs.
Daily practical issues keep cropping up, for many of which neither the authorities nor the GSTN has any answers. AMRG’s Rajat Mohan shares his experience: “I filed for refund for one client but there was a mistake in the application and the refund was rejected. Since I claimed refund (of a certain amount), the amount gets deducted from my credit ledger. However, even after rejection of the refund claim, the money has not been credited back to my credit ledger. Now, unless they revert the amount in my credit ledger, I cannot apply again for refund.”
He says the problem is with GSTN, which has not yet developed that utility through which money is reverted into the credit ledger. Refunds are pending since July last year, and he can neither get that refund nor can he re-apply. “It has been 365 days, and they have not been able to develop that utility.” Ideally, I should get interest on the money stuck for no fault of mine, but then for that we may have to start litigation,” says a visibly frustrated Rajat.
(For those new to GST, all taxes paid by the taxpayer on inputs are recorded in the electronic credit ledger. The credit in the electronic credit ledger can then be used to offset GST liability. Any excess input credit in the credit ledger can be claimed as refund.)
Technology is not the only reason for refund delays. FIEO in a statement stated that tax authorities are reluctant to accept applications and ask for irrelevant documents. Some states have even cited lack of funds for delay in refunds. The law requires 90 per cent of refunds claimed should be provisionally granted within seven days of submission of the application, and 100 per cent in two months. Experts say the system as laid down in the law is not at all functional.
"Authorities are not following the system of refunds as prescribed in the law. They are saying that the refund would be made once and for all," says Saloni Roy, senior director, Deloitte India.
New Evasion Methods
While talking to Business Today recently, Kerala Finance Minister Issac Thomas said that a tradition of tax evasion is coming up. Nobody can do anything unless you have sufficient information. He was referring to the GST Council’s – which he is also a part of – inability to put in place a return filing mechanism that has the matching system.
“APART FROM CONTINUED FOCUS ON FURTHER IMPROVING USER INTERFACE AND EASE OF FILING RETURNS, OUR EMPHASIS IN THE COMING YEAR WILL ALSO BE ON DATA ANALYTIC TOOLS TO IMPROVE TAX COMPLIANCE.” Prakash Kumar CEO, GSTN
The Kerala FM was probably stating the obvious. It is now an open secret that many traders and dealers are finding a way out to outwit the tax authorities and pay less or no tax. Traders from Indore in Madhya Pradesh, well known for its local food brands, are showing the way. When GST was announced in July 2017, many local brands went out of the market for over a month, says a local retailer. But these brands are back after finding loopholes in the system which they can capitalise on.
Most brands have now started generating bills for 10-15 per cent of their products, but continue to sell a majority of products in an unorganised way. "I don't know for how long they will be able to do business this way, but none of the local brands are doing business in an organised way," says a distributor of an established Indore food brand.
They have found a way out to duck the e-way bill. A wellknown 'namkeen' brand, says this distributor has started transporting products on Volvo buses to avoid taxes, while some are using milk men to distribute products. A detergent maker in Rau on the outskirts of Indore cribs that despite having a GST number, he isn't able to do business the proper way as raw material suppliers refuse to give him a bill.
In the absence of the matching system, the cornerstone of GST and its success, government is provisionally giving input tax credits, and there is fear that many of the input credit claims could be fake and fictitious. The final return filing system, which would have the invoice matching system, may take another one year to be in place.
The government’s first brush with fake claims happened last year when it started getting claims of transitional credit. Against the claims of ` 65,000 crore, the government said only ` 12,000 crore were genuine. Cases of fake issuance of invoices have come to light against which input credits were claimed. Recently, in a fake invoice fraud unearthed by the Howrah Central GST Commissionerate, it was found that fake invoices worth Rs 43 crore were issued to 63 GST taxpayers, who used these invoices to claim inadmissible input credits.
Missing Tax Buoyancy
In a blog written on the eve of GST completing one year, (former) finance minister Arun Jaitley said: “In the very first nine months, the total amount collected is ` 8.2 lakh crore–
` 11 lakh crore if annualised, yielding a revenue growth of 11.9 per cent i.e. a tax buoyancy of 1.22, which has historically been achieved very rarely for indirect taxes despite rates being lowered for consumers.”
However, there is a sense of discomfort within government about the kind of tax collection. Revenue Secretary Adhia admits tax buoyancy is low, and the government needs to be watchful on that front. After averaging around
` 89,000 crore monthly collection in the first nine months, the first two months of the current fiscal saw collections of
` 94,000 crore and ` 95,000 crore, respectively. But this
is still far from the average monthly budgeted estimate of 1.04 lakh crore. A Kotak Securities report says: “The 2018-19 monthly average collection is around 97,600 crore (and falling)—significantly lower than the budgeted
1.04 lakh crore. This implies the required run-rate for the remaining months will be around 1.06-1.07 lakh with the asking rate creeping up in case there is significant upside in the near term.”
What’s making matters worse is unavailability of comparative figures from previous years. “The monthly collection figures do not mean much unless government comes out with comparative figures,” says Atul Gupta, senior director, Deloitte India.
Pronab Sen, former chief statistician of India, says that like-to-like data is not readily available for comparison. “There were 17 taxes subsumed in GST, most of which were levied at the state level. The data of only three – excise, service tax and VAT – are easily available,” says Sen.
Litigations Galore
With 200-300 writ petitions filed against different provisions, there is a huge amount of GST related litigation already in different courts. Anita Rastogi of PwC says that writ petitions are being filed left, right and centre. We did not expect so many litigations in the first year itself. What’s compounding the confusion is the Authority for Advance Rulings (AARs). In two different states AARs have come out with different judgements on the same issue.
Abhishek A Rastogi, tax partner, at law firm Khaitan & Co., who has himself filed 30 writs petitions against different GST provisions, however, says the GST Council has been very responsive when it comes to issues raised by industry. Almost 30-40 per cent of the writs have been rendered infructuous due to timely intervention of the council.
The Brighter Side
While there are many issues with GST, all is not lost in the government’s efforts to implement GST. Despite teething troubles and confusion over the new law, the government crossed some crucial milestones with GST.
Broadening Tax Base
One of the primary goals of GST was to increase the tax base by bringing more people/businesses into the tax net. In the first year itself, GST has been successful in achieving this target. The number of registered taxpayers have grown from 64 lakh in previous regime to over 1.12 crore, a massive increase in the number of taxpayers. This is no mean feat by any standard.
"A total of 11,215,693 taxpayers stand registered with the GST system today of which 63,76,967 are the ones who have migrated from previous tax regimes and 48,38,726 are the ones who have entered the new tax regime in the first year of GST indicating a significant increase in active taxpayer base," says A B Pandey, Chairman, GSTN.
This has helped increase the direct tax collection numbers. According to the IT department, there has been a 44 per cent gross increase in advance tax collection in personal income tax category and 17 per cent in corporate taxes in the first quarter of 2018/19. The IT department added one crore new tax filers in 2017/18. “While it is difficult to ascertain how much of this growth is due to GST, it is true that the growth is a result of all anti-black money measures that the government has taken including GST,” says revenue secretary Adhia.
Increase in Compliance
Despite many technological glitches in the GST IT system and taxpayer's unfamiliarity with the system, the number
“THERE WERE 17 TAXES SUBSUMED IN GST, MOST OF WHICH WERE LEVIED AT THE STATE LEVEL. THE DATA OF ONLY THREE – EXCISE, SERVICE TAX AND VAT – ARE EASILY AVAILABLE ” Pronab Sen Former Chief Statistician of India
of returns filed on due date steadily increased over the past year. The compliance level on due date reached an average of 65 per cent by April this year from around 55-57 per cent in September-October last year. This could be attributed to stabilising of the existing return system. With so much data available and data analytics by GSTN, the government can now enforce the law better. As a result compliance would only increase.
“Apart from continued focus on further improving user interface and ease of filing returns, our emphasis in the coming year will also be on data analytic tools to improve tax compliance. We have provided 30 odd MIS reports to tax officers and we are going to provide 20 more MIS reports to Tax Commissioners to help them to have more tax related data. All these mechanisms are intended at playing the dual role of making tax compliance easier while making tax evasion difficult,” said Prakash Kumar, CEO, GSTN.
The Way Forward
Clearly, GST needs ironing out of glitches over the next year. GSTN needs to improve the user interface, and create the tools that are missing now leading to delays in refunds. Putting in place the final return filing mechanism and kicking in the matching concept is the next big task at hand of the GST Council and the authorities.
More rate rationalisation is likely to happen. Few more goods and services would be removed from the 28 per cent category. But there are bigger challenges ahead. There has been a demand for convergence of 12 per cent and 18 per cent rates into one rate. That is easier said than done. It would require taking states in to confidence. But with the changing political landscape, things may get tougher way forward. Some exempted sectors – petroleum, education, healthcare – have been demanding their inclusion in GST. For that to happen, the government will have to consider its revenue requirements and political compulsions.
The road ahead for GST is no less challenging than it already was in its first year of existence.
“BRINGING IN CESS FOR WHATEVER REASON WOULD COMPLICATE THE DESIGN OF GST. WE ALREADY HAVE MULTIPLE RATE STRUCTURES AND ACTUALLY HAVE TO COLLAPSE THE RATE STRUCTURE OVER TIME ONCE COLLECTION STABILISES” Harishanker Subramaniam Tax Partner & National Leader, EY India