Any reform of the magnitude of the goods and services tax (GST) will encounter issues, and the last four months have seen angst about high rates, chaotic compliance and delayed flow of credits and refunds. This angst provided fodder for opposition criticism of GST, though they were party to the policy making body the GST Council. The government had to respond with an interim overhaul to control the narrative and that’s what we saw the GST Council deliver on 6 October 2017 and 10 November 2017.
While fringe rate tweaks have been norm right through, the 23rd GST Council meeting delivered a real bonanza by reducing rates across slabs for 200 items way beyond industry expectations. Most significant was the decision to reduce 177 items from 28% to 18%, a decisive move that will please industry, enthuse consumers and even spur some consumption. The industry will respond to headline rates reduction with price drops and we have already seen some announcements. These rate changes are effective from 15 November 2017 and the notification giving effect to the same has already been issued. However, in case of old inventories with 28% tax, there will be an issue of interim excess credits or higher embedded tax requiring price corrections.
50 items in 28% category is still large, considering the original objective of having only a limited number of demerit items, as per chief economic advisor’s report. Goods like paints, cement, automotive components and consumer durables need a revisit, and I am sure the council will act once they get a sense of net revenue collections. Early trends indicate monthly average of over Rs90,000 crore, with 30-35% IGST bucket as intermediate taxes. The government still needs to factor credits (transitional/monthly) and refunds whose final numbers are unknown. Collections will increase with improved compliance and change in economic sentiments in remaining quarters.
Composition rates (other than for restaurants) were brought down to 1% with additional relief of taxable turnover excluding non-taxable and exempt categories. GST on restaurants (other than in hotels with tariff Rs7,500 and above) was brought down to a flat 5%. From a policy perspective, lower rates without input tax credit is undesirable and goes against the grain of the GST principle. Organized large format restaurants are crying foul on credit blockage. Both the finance minister and the council reacted strongly to this sector not passing credits by reducing prices and the policy reaction is maybe a strong signal to all to pass benefits. The second big irritant for all and specially micro, small and medium enterprise (MSMEs) has been GST compliance, calling for an urgent need to ease burden. What India attempted was transaction-level reporting for GST transactions to track value chain for better compliance and widen tax base and effective credit matching for focused non-intrusive limited audits.
With our objective of raising tax to GDP ratio, this move was in the right direction, but what we misjudged was the magnitude of this change, that too in a digitised form. IT systems require time to test and stabilise for GST Network, service providers and the industry. It would have been ideal to progress to this transactional level matching gradually from April 2018 and continued with summary returns (GSTR3B) allowing stakeholders to test and become comfortable.
I am happy the government and council have responded by announcing a slew of pragmatic measures, foremost of them allowing summary GSTR3B monthly returns till March 2018, with further simplification for “Nil” return filers. Another big change was deferment GSTR2 (inward supplies) and GSTR3 (monthly) returns for July 2017 to March 2018 till such time committee announces revised timelines.
GSTR2 filing was the most complex, this required tax payers to first compile their own monthly purchase register, download what their vendors/branches uploaded in GST Network (as GSTR1 outward supplies for that month) reconcile transactions to determine missing, incorrect and additional records, upload their responses to GST Network, and file their GSTR2 for appropriate credit eligibility. With everyone still early to this process, filing of GSTR1/GSTR2 was onerous to say the least; so, deferral was a wise solution.
Till March 2018, taxpayers will now file GSTR1 (outward supplies indicating one’s tax liability) every month besides monthly return of GSTR3B. For taxpayers with aggregate turnover of up to Rs1.5 crore, returns will be filed for quarterly period on scheduled dates and for those above Rs1.5 crore, monthly as scheduled providing sufficient time. Government with this mandatory GSTR1 filing continues transaction-level reporting concept to enable them to link and monitor how presumptive input tax credits and refunds work in summary GSTR3B returns.
Exporters’ refunds for IGST paid has started; also the utility for exporter input tax credit has just begun and requires some expeditious action and early release of refunds for easing working capital pains.
We all knew our GST design was not optimum; the government made compromises to implement it. But what’s heartening to note is its continuing resolve to respond to feedback and improve as we progress on this critical tax reform.
Harishanker Subramaniam is national leader, indirect tax at EY India. Views expressed are his personal.