On July 1st, 2017 India ushered in the Goods and Services Tax (GST). Though the first year of GST was beset with several teething problems, available evidence suggests that the country has successfully passed them. Though there is a view that GST was implemented hastily without adequate preparations, it is gratifying that the country could tide over most of the problems through appropriate policy interventions. Here is an overview of India's experience with GST and specific interventions of the GST council during the last one year.
TEETHING PROBLEMS AND ECONOMIC SLOWDOWN
India's brief experience with GST provides valuable lessons, especially to large and diverse countries. Though GST is expected to benefit the whole economy in various sectors, teething problems during the months following implementation earned a bad name for it. Moreover, cursory evidence suggests that it has an overall dampening effect on the Indian economy. The economy was already undergoing a slowdown due to demonetization and GST is said to have deepened it. As a consequence comma Indian economy registered a lower growth rate during 2017-18. The post GST issues can be broadly divided into two: problems related to GST is design and problems related to compliance.
Problems related to GST design:
one of the major objectives of GST was to widen the taxes in the country by bringing the manufacturing sector under the tax net. However, instead of achieving this over a period of time, India probably made a mistake by immediately fixing a low threshold thereby bringing tens of thousands of small business under the tax net at one go. With the implementation of GST, all manufacturers having a turnover above Rs 20 lakhs are made liable to get registered and collect or pay GST. In spite of the attraction of getting Input Tax Credit, the requirement to levy GST on all other supplies and to comply with the tax laws caused considerable distribution among Micro, Small and Medium Scale Enterprises (MSMEs).
Problems related to compliance:
Experience shows that from the point of view of tax compliance, Indian GST is not very simple. A regular taxable person has to file 3 returns every month in addition to an annual return. These are to be filed through the GSTN portal and some of the returns should be accompanied by details of invoices and statements. Adding to their compliances burden, businesses having branches in different states have to get registered in each of the states. Failure to meet the deadlines for filing returns attract a penalty. While formal sector businesses were better prepared to interface with the GSTN portal, thousands of small businesses felt like being caught unawares.
INTERVENTIONS BY THE GST COUNCIL
A remarkable feature of India's GST is the GST council which includes representatives of All-state governments and the Union government. In a federation like that of India, the cooperation between center and state is crucial to the successful implementation of massive tax reform of GST's proportion. Since the implementation of GST, the council has been closely monitoring the progress of implementation and met 29 times to tweak inappropriate changes. The interventions of GST council which focused on easing compliance and rejigging the tax rate structure, considerably mitigated the hardships, especially of the small businesses.
India's GST is on a learning curve. one year of GST shows that the country can look forward to a much simpler GST in the coming years. The number of rate categories can be reduced to two or three. Compliance level will go up as GSTN achieves the capability to mine the massive data contained in various returns submitted by taxpayers. Once this is done, it will make tax evasion and avoidance difficult if not impossible. Matching all invoices which the GST council has deferred will be the next step in this direction. As revenues go up, GST council can consider bringing petroleum products, electricity and real estate under GST. Post-implementation issues do not detract from the fact that a country of India's size and diversity could successfully steer through then and successfully implement this major tax reform.