📅 5 Years of GST: The Good, the Bad and the Current Mess
Five years ago India saw a drastic change. Was it for the good or the bad?
5 years back, the government of India took a historic step: Introduced Goods and Services Tax.
The aim? Remove cascading or overlapping tax system in which taxes had to be paid at every stage in the supply chain, increase government's revenue and eliminate tax evasion.
After 5 years, we're here to take a peek at GST's report card and analyse the current mess it has created.
🔍 The Impact of GST
To understand GST, we first need to take a look at the system before it.
Under the previous tax systems, a lot of indirect taxes existed, and each state had different tax rates, making things very confusing for taxpayers.
All of these indirect taxes have now been brought under one roof: GST, making things much easier for taxpayers.
Moreover, GST has seen the government's tax revenue grow year on year. Just in FY22 we achieved a record 27% growth in payable taxes.
This growth comes as more and more businesses, that were previously unorganised and didn't exactly pay taxes, are also now registering themselves and paying taxes. Why?
Thanks to Reverse Charge Mechanism.
You see, under the older system the supplier of goods had to pay taxes on the sale of goods.
So, a lot of unorganised sectors which were basically sourcing goods were exempt from taxes.
Same goes for importers. Since the supplier was technically out of the country they were exempt from paying taxes, thus robbing the government of precious taxes.
The reverse charge mechanism puts an end to this by making the recipient pay taxes.
India's indirect taxpayer base has increased from 66.25 lakhs to 1.2 crores after GST was implemented (however, we're not entirely sure if the full credit for this should go to the GST system).
Also, dealing with just this one tax has made things much easier for businesses.
Over 90% CXOs in India feel that GST has improved the ease of doing business in the country.
So, you see, GST has made things much better for taxpayers as well as the government. But it is in no way a foolproof plan.
🧐 The Drawbacks of GST
One of the major points of contention with GST is that tax rates are too high. In fact, India has the highest tax rates out of all the countries that have implemented GST.
And the government has further increased GST on several items in its latest meeting.
Many household items, like curd, milk, puffed rice, that were previously exempt will now attract a 5% tax.
The move will help the government, which is currently struggling due to the reduced excise duty on petroleum, boost its revenue.
But it will also negatively impact the common public which is already facing the wrath of high inflation.
Another major problem with GST is that it has fallen short of its promise to make tax paying much simpler.
Compliance issues, especially related to the input tax credit have created major troubles for businesses.
You see, to claim input tax credit your receipts for the taxes you paid must match exactly with that of the supplier's. If your supplier doesn't upload the tax receipt on time or even if there is a minor clerical error. Your refund is stuck.
This has majorly impacted several industries.
But you know who has been the most negatively impacted by GST?
States.
Before GST, states used to get taxes directly from the taxpayers but now they have to divide this revenue with the government.
Not just that, GST favours states that consume more rather than those that produce more.
Huh?
You see, earlier the taxes you paid on a product used to go to the state that manufactured it.
But now, it goes to the state where it is consumed.
So, you may be wearing clothes from Delhi, but it will be West Bengal that will get the tax money.
Now, the states that had spent money in setting up manufacturing facilities felt cheated.
So, just like how our parents convinced us to eat veggies by promising chocolates afterwards, the government got the states to agree to GST by giving them compensation cess.
Compensation cess is basically a temporary tax on luxury goods like alcohol and cars that the government introduced just to compensate states for their loss of revenue.
This tax was to be applicable only for 5 years, which means it ends this year.
However, states want this tax to continue on for a few more years because the two years of pandemic hurt them economically.
Now, in a shocking move the government has agreed to extend the collection of this cess till 2026.
But the problem? They haven't yet clarified if this money will go to the states.
Where else could it go then?
The central government. But why?
Remember the compensation cess we talked about?
Thanks to the pandemic our consumption of luxury goods went way down, so the compensation cess collected in those years was really low.
So low in fact, that the government had to take loans to pay the state the dues they were owed.
Now, the government plans to continue using this cess to pay back these loans.
This has made some states very mad, so much so that they are now demanding that states should get 70-80% of the GST collected (currently it is divided 50%-50% between the state and the centre).
And they're not the only ones who are mad. Several industries are also unhappy that this extra price burden will continue to be applied on them especially at a time when prices are already high.
Moreover, this defeats the whole point of the One Nation, One Tax scheme.
But nothing can be done about this, right?
Well, thanks to a recent ruling by the Supreme Court, states could do something about this.
The Supreme Court recently ruled that Gujarat High Court had the right to waive off the dual payment of GST (importers had to pay both an IGST and customs duty on imported goods) on ocean freight (goods transported via the ocean).
It also said that the GST council's rulings would not be binding on the states.
So, the states could begin to collect compensation cess on their own or levy new taxes which would further challenge GST.
Though this is highly unlikely, this threat gives the states a major bargaining chip for the current situation.
Only time will tell if the centre will actually give in to their demands.
All in all, the 5 years of GST have been riddled with controversy. Though the government has been praising rising tax revenue, the system needs to be improved a lot so that citizens can also join in on the praise.
⚡ In a line: GST has its benefits and its drawbacks but its drawbacks are currently weighing heavy and could possibly overturn the One Nation, One Tax regime.
💡 Quick question: Do you think the states’ demand is justified?
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