The Goods and Services Tax (GST) in India, implemented six years ago, marked a significant turning point in the country’s tax system. It was introduced with the promise of simplifying the complex web of indirect taxes and unifying the nation into one common market. GST aimed to enhance economic efficiency, reduce tax evasion, and promote ease of doing business. This article explores the journey of GST in India, its promises, challenges, and the impact it has had on the nation’s economy.
Birth of GST
To understand the need for GST in India, we must look back at the country’s history of indirect taxes. Since 1944, when the Central Excise Act was introduced, India had a variety of indirect taxes. These included the Central Excise Act at the national level and Sales Tax laws at the state level. This dual tax system meant that both the central and state governments were imposing taxes on citizens differently.
In 1986, India introduced the MODVAT scheme, allowing businesses to claim credit for central excise paid on inputs. This was a step toward streamlining taxation. In 1994, Service Tax was introduced, and in 2004, the government allowed cross-utilization of credits between excise and service tax.
In 2005 and 2006, states began implementing the Value Added Tax (VAT) system, which allowed a credit of sales tax paid on inputs. However, these reforms did not eliminate the core issue: India had two different tax regimes, one at the state level and one at the central level. This led to complications, including the cascading effect of taxes, high litigation, and classification challenges.
Recognizing the need for a comprehensive tax reform, the Kelkar Committee, led by Dr. Vijay Kelkar, was appointed to recommend a new tax system. Dr. Kelkar’s committee proposed the idea of GST, which would have a dual structure – one at the state level and one at the central level. This laid the foundation for the eventual introduction of GST.
The journey to implement GST began in 2006 when the target date was set for April 1, 2010. However, this date passed without any progress due to the states’ apprehensions about losing their tax collection rights. The deadlock continued until Narendra Modi became the Prime Minister, and Arun Jaitley was given the responsibility to negotiate with the states.
After extensive deliberations in the GST Council, a GST law was formulated. On July 1, 2017, India witnessed the official launch of GST, unifying a multitude of taxes and introducing a simplified, nationwide taxation system. This marked the culmination of a 12-year journey to make GST a reality.
GST and the Four Promises
The implementation of GST was done in India with four major promises:
1. One Nation, One Tax
The most significant promise of GST was the introduction of a unified tax structure. The system aimed to bring the majority of taxes under its ambit, eliminating the cascading effect of taxes and simplifying the tax structure for businesses. While this promise has largely been fulfilled, some taxes, like petroleum products and alcohol, still remain outside the purview of GST.
The impact of GST on businesses has been substantial. The transition from multiple state taxes to a single national tax has significantly reduced the complexities of inter-state trade, making it more efficient and cost-effective. GST has contributed to creating a more unified and competitive marketplace, making it easier for businesses to operate across state borders. However, with different tax slabs, it has translated more into ‘One Nation, One Product, One Tax’.
2. Seamless Movement of Goods
The second promise of GST was to ensure the seamless movement of goods, with the vision of eliminating interstate checkposts and facilitating uninterrupted transportation. While the goal was to have a nation without checkposts, the reality is that checkposts, in some form, still persist.
India’s transport sector is plagued by various checkpoints, although not as extensively as in the past. Trucks do experience fewer stoppages, but the promise of a completely smooth journey has not been entirely realized. The movement of goods has indeed improved from the pre-GST era when states would frequently halt trucks, but there is room for further simplification.
3. Seamless Input Tax Credit
One of the critical aspects of GST was the promise of seamless Input Tax Credit (ITC), enabling businesses to offset the tax paid on inputs against their final tax liability. However, achieving this ideal credit system has proven challenging.
Several products and goods, as outlined in sections 17 and 17(5), remain excluded from ITC claims. For instance, businesses cannot claim credits on expenses like constructing offices or factories. This limitation mirrors the issues that plagued the pre-GST era, undermining the promise of seamless ITC. To fulfill this promise, the government should consider allowing all credits to be utilized without restrictions, especially for genuine business expenses.
4. Ease of Compliance
GST aimed to simplify tax compliance, reducing the number of returns and paperwork. In the earlier tax regime, different taxpayers had varying return filing obligations, with some required to file an extensive number of returns. For instance, a manufacturer might have had to file up to 39 returns in a financial year, while a service provider filed only two.
With GST, every registered entity must file multiple returns, particularly if they opt for monthly filing. This results in a complex compliance system, with businesses facing the burden of reconciling various returns. The promised ease of compliance has largely gone unfulfilled.
Challenges in GST Regime
Despite its transformative impact, the GST system in India faces various challenges that must be addressed to unlock its full potential.
1. Complex Tax Slabs
The multiplicity of tax slabs and rates has often been a subject of debate and criticism. Simplifying the tax structure by reducing the number of slabs can enhance transparency and make GST more business-friendly. The government needs to consider this aspect to further the cause of ‘One Nation, One Tax.’
2. Technological Challenges
While technology has been a crucial enabler for GST, there are still areas where improvements are needed. Technical glitches in the GST portal, invoice mismatches, and frequent changes in return filing procedures have caused significant challenges for businesses. A more robust and stable IT infrastructure is essential to eliminate these issues.
3. Incomplete Coverage
Certain critical sectors, like real estate and petroleum, are outside the GST framework. Bringing these sectors under the GST umbrella can further streamline the taxation system and enhance its effectiveness.
4. Simplicity and Clarity
The language and structure of GST laws need to be simplified and made more comprehensible. The complexity of compliance procedures, coupled with frequent changes in the law, can be daunting for businesses. Clarity and consistency are crucial in addressing these issues.
Positive Outcomes of GST
The implementation of GST in India has brought significant positive outcomes. Tax collection has seen a substantial increase, with monthly collections exceeding 1.5K crores, marking a considerable improvement. Furthermore, GST has effectively reduced tax evasion through its unified tax system and transparent reporting, aided by robust IT infrastructure and compliance measures. This reduction in evasion has bolstered government revenues and promoted tax fairness.
Additionally, GST has streamlined India’s complex tax structure, resulting in a more straightforward and efficient system. By replacing numerous state and central taxes, it has eliminated the cascading effect, reducing prices for consumers and enhancing the ease of doing business. This simplification has spurred economic growth and investment. In summary, the positive outcomes of GST encompass increased tax collection, decreased tax evasion, a simplified tax structure, and overall economic growth, contributing to a more business-friendly and transparent tax regime in the country.
International Experience of GST
At this point, it is also important to know how the One Nation One Tax concept has fared in other countries. Around the world, many countries have adopted GST in some of the other variations. The table below showcases the impact of GST on the major economies.
|Year of Introduction||1986||1991||1992||2000||2017|
|Model of GST||Single||Dual||Single||Single||Dual|
|Standard GST Rate||10% to 15%||5 – 15%||7%||10%||18|
|Did inflation Increase||Yes||Yes||Yes||Yes||No|
|Did the tax to GDP ratio increase||Yes||Yes||Yes||Yes||Yes|
|Was Ruling Party re-elected post introduction of GST||No||No||No||No||Yes|
As India marks the sixth anniversary of GST, it’s clear that the tax reform has made significant progress in fulfilling its promises. ‘One Nation, One Tax,’ improved tax collection, and reduced tax evasion stand out as notable achievements. Challenges like complex tax slabs, technological issues, and compliance difficulties still need attention.
While GST has come a long way, it’s not without its challenges. To fully realize its potential, ongoing efforts are necessary. The government and businesses must collaborate to simplify the tax system further, contributing to India’s economic growth and ease of doing business. The journey continues, with more work needed to make GST a game-changing reform in India.