Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Key Phrases: Goods & Services Tax, Indirect tax, GST Council, Revenue-neutral rate, One Nation One Tax, Harmonised Structure (HS), Machine-compatible classification, blockchain.

Why in News?

• In a recent meeting of the GST Council tax rates have been increased on several products.
• Current weighted average GST rate at 11.6 percent (RBI calculation, September 2019) is still below the revenue-neutral rate of about 15 percent and therefore, it is believed that increase in GST rates would not disturb the macroeconomic picture
• On GST’s fifth anniversary, the GST Council should now focus on introducing bold reforms to usher in the next high-growth phase of GST and the economy.

What is Goods and Services Tax?

• Goods and Service Tax is a multi-stage, comprehensive, destination-based tax that is levied on every value addition.
• In layman’s language, the Goods and Service Tax is an indirect tax levied on the supply of goods and services. This law has replaced many indirect tax laws that existed earlier in the country.
• GST is one indirect tax for the whole of India.
• It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.

What is GST Council?

• Article 279A – GST Council to be formed by the President to administer & govern GST. It’s Chairman is Union Finance Minister of India with ministers nominated by the State governments as its members.
• The council is devised in such a way that the centre will have 1/3rd voting power and the States have 2/3rd.
• The decisions are taken by 3/4th majority.

Types of GST

There are four different types of GST levied on the goods and services in India that are as follows:

• Central Goods and Services Tax (CGST) – The Central Government of India charges the CGST on transactions related to goods and services within a state.
• State Goods and Service Tax (SGST) – The State Governments in India charge the SGST on transactions related to goods and services within a state. It gets charged along with the CGST.
• Union Territory Goods and Service Tax (UGST) – The Union Territories in India charge the UGST on transactions related to goods and services within their boundaries. It gets charged along with the CGST.
• Integrated Goods and Service Tax (IGST) – If the transaction related to goods and services is between two states, the government will impose the Integrated GST. It is also applicable to imports and exports. The Taxes charged under IGST are shared both by the centre and state.

Required transformational reforms:

• Set the small firms free by raising the exemption limit:
  • GST data show that of the total 1.4 crore registrations, firms with less than ₹1.5 crores annual turnover account for 84 percent but contribute less than 7 percent of the tax collected.
  • Currently, registration for GST is optional for firms with an annual turnover of less than ₹40 lakh for goods and ₹20 lakh for services.
  • The exemption limit must be raised to ₹1.5 crores for goods and services.
  • This amounts to ₹12-13 lakh monthly turnover, which at 10 percent of profit margin, translates into just ₹1.2 lakh.
  • Only a fraction of this money will remain with the business owner after payment of working capital and fixed expenses.
  • Benefits:
    • The new limit would reduce the load on the GST system, which will deal with less than 23 lakh taxpayers in contrast to 1.4 crores now.
    • The reduced load will allow the GSTN to introduce an invoice matching concept, which will result in 100 percent compliance, solving the problem of fake invoices and tax theft.
    • The increased tax collection will adequately compensate for the 7 percent tax loss.
    • The proposal will take out 99 percent of small firms from the tax net, increasing their profit and making them more competitive.
    • The step will revolutionise the small sector. Free from GST hassles, small firms can invest in technology and create more jobs.
• Do away with State-wise registrations:
  • Today, if a firm does business in 10 States, it must obtain 10 GSTINs and maintain a separate account for each. The GST rules set a restriction on the use of available credit.
  • For example, if a firm has a surplus SGST credit in Maharashtra, it cannot use this credit to pay SGST dues in Karnataka or CGST dues to the Central Government.
  • This restriction results in capital blockage and defeats the ‘One Nation, One Tax’ concept.
  • GSTN has precise location information of all transactions and can calculate States’ dues from this data.
  • The GSTN software may be tweaked to allow credit transfer between two States or between the Centre and States.
  • This flexibility of credit transfer will not impact a State’s revenues. The GSTN will credit the due amounts to the State’s account, keeping the principle of destination-based tax intact.
• Need for Fewer rates
  • Many countries implementing GST have just one rate for all items. From zero to 28 percent.
  • India has seven rates.
  • This number increases if we also consider compensation cess rates. The tax slabs should be reduced to three.
  • Mining the past five years’ GST data will identify less important categories from a revenue angle and help reduce tax slabs without compromising revenue.
  • The Government must open this data for research purposes after suppressing commercially sensitive information.
• Machine-compatible classification:
  • There is also the need to simplify the GST rate list and make it compatible with machine processing.
  • The GST uses Harmonised Structure (HS) codes for classifying most items.
  • GST rules have exempted small firms from mentioning any HS code. Others must mention the HS 4–6-digit code; exporters must mention the HS 8-digit code.
  • Non-uniform criteria for mention of HS code ensures that the computer cannot match the invoices.
  • There is another issue with the current rate list. While most products are listed at HS 4 level, no specific HS codes are mentioned against many products creating hurdles in data processing operations like linking transactions.
  • The government may mandate for everyone the use of the HS 6-digit code.
  • Such clean classification will remove confusion caused by the current complex classification and help match invoice level details.

• Operationalise invoice matching and unify State portals with GSTN:
  • The GST rules provide system-driven invoice matching to enable quick tax credits and avoid the prevailing fake invoice problem. The GSTN must gear up to implement this.
• Reduce working capital blockage for exporters:
  • 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.
  • The GST Council in 2018 recommended a new e-wallet facility for exporters.
  • The exporters’ e-wallets will have notional credits. The exporters will use these instead of cash to pay GST.
  • The transactions have to be reconciled periodically to prevent misuse.
  • Using blockchain to maintain the integrity of the e-wallets may be explored.

Conclusion:

• The GST is regarded as the most significant tax reform in India since its Independence.The proposed reforms will prevent tax leakage and make GST more efficient and inclusive.

Source: The Hindu BL

Mains Question:

Q. What are the problems with the present GST system? Suggest measures to prevent GST leakage and making it more efficient and inclusive.