It has been three years since the Goods and Services Tax (GST), India’s biggest tax reform, was introduced on July1, 2017. Since then, it has been a roller-coaster ride for the government, for industries and consumers due to this transformational law, which replaced a fragmented State and Central based law on indirect tax.

This was coupled with changes and reforms, primarily focussed on rationalising rates, simplifying procedures, and curbing tax evasion. Additionally, we have also witnessed stabilisation of one of the world’s biggest online tax compliance system — the GSTN.

As we celebrate the third anniversary of India’s biggest tax reform since Independence, and talk about the focus areas for the future, let us also rewind and glance at some of the critical milestones achieved during the past three years.

Increase in tax base : From over 64 lakh taxpayers migrating into GST regime, India had about 1.23 crore active GST registrations as on March 31, 2020. This growth indicates a significant increase in tax base and a change in taxpayers’ compliance behaviour.

Rate rationalisation : With frequent changes in tax rates, the government continued to focus on rationalising GST rates. On July 1, 2017, around 19 per cent items were under the 28 per cent GST rate bracket, which is now down to only around 3 per cent. Also, about 50 per cent items are in the 18 per cent bracket, 21 per cent face 12 per cent tax, and 25 per cent of items are subject to 5 per cent GST.

Introduction of e-way bill system : Introduction and stabilisation of the e-way bill system was also a major step taken in the right direction. By enabling some 56 crore e-way bills generation in FY19 and around 63 crore during FY20, the system has been largely streamlined and has enabled hassle-free movement of goods across States.

Legislative amendments and clarifications : From its original shape and form as on July 1, 2017, the GST law has undergone significant changes. With almost 700 notifications, 145 circulars, and over 30 orders, significant changes have been made to address taxpayers’ demands, to carry out procedural simplifications and curb tax evasion.

The above statistics are encouraging and show the right intent of the government towards further simplifying the GST law. We shall now proceed to discuss the key challenges faced during these years, which industry hopes will be addressed by the government.

GST policy

Restrictions on the transitioning of pre-GST credits has resulted in multiple litigations

Non-issuance of clear-cut guidelines related to anti-profiteering law has created confusion and fear in the industry, particularly with those dealing in consumer goods

Issues around “deemed supply” transactions amongst branches in country and related-party transactions in the country and cross border

Blockage of input tax credits (ITCs) and limited ability to seek refund — that is,, only on exports and inverted duty structure of goods

Denial of input tax credit on the construction and setting up of related capital expenditure

Mandatory registration for sellers on e-commerce platforms and impact on working capital for these sellers on account of TCS

Procedural issues

Blocking of input tax credit by authorities in GSTN system due to non-reconciliation

Complex return filing process and issues related to functioning of the GST network system

Ambiguity over jurisdictions, particularly on tax audits and investigations

Investigation authorities commencing detailed audits in some cases

The aforementioned challenges coupled with the impact of Covid-19 have not only affected large companies but also liquidity of MSMEs. Additionally, due to lack of resources, MSMEs are also not able to do their regular compliance. In view of these, the following are some of the suggestions which the government may consider to improve liquidity as well as simplify compliance:

Improving liquidity

Allow refund of accumulated GST credit due to inverted duty structure, triggered by input services as well

Permit payment of IGST on import of goods and services, using accumulated input tax credits

Make input tax credit of CGST fungible across States

Allow transfer of GST credit, as scrips

Allow refund of GST paid on capital goods to exporters

Easing compliance

Extension in the timelines for mandatory input tax credit reconciliation for taking ITC beyond September

Relaxation in the timeline of 180 days provided under Section 16 for taking input tax credit

A world-class, simplified, and technology-enabled robust GST system is not only critical for sustainable growth, but also imperative for the ease of doing business. In the next few years, the government may take steps to further simplify the GST law. These steps can prove to be a harbinger of growth at a time when the entire world is affected by the Covid pandemic.

Implementing e-invoicing and new returns, rationalising GST rates, reducing litigations related to transitional credits, centralising advance ruling authority, having a single jurisdiction for audits and investigations, and strengthening the GSTN system would be the key areas to watch out for in the near future.

The writer is Partner and Leader Indirect Tax, Deloitte India

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