India celebrated the fourth anniversary 2017 implementation of Goods & Services Tax this month. It has proved a huge milestone in providing a business-friendly tax system which held back many parts of the economy.
GST replaced a swath of Centre (Delhi federal govt) and States’ (28 regions) complex and cascading indirect taxes, including Service Tax, CENVAT, VAT and professional services tax.
There have been ongoing changes to the indirect tax since then, including the April 2021 e-invoice roll out completion. But more work remains to be done. The biggest challenge is yet to come: the ending in 2022 of the state five-year GST compensation scheme.
Four years of ongoing reform
Following the 1 July 2017 launch of VAT, many adjustments were made as the initial hopes of an automated sales and purchase invoice clearance system were dashed.
- 2021: e-invoice rollout for B2B and B2C completed
- 2019: integrated GST refunds system
- 2019: GST threshold raised to 40 lakhs
- 2018: India e-way bills introduced
- 2017: sales and purchase reconciliation suspended (GSTR-2 and 3 suspended)
- 2017: GST launched
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More work required
Introducing a consolidating indirect tax regime was a huge achievement which had evaded many previous governments for over ten years. But there remain many inefficiencies that still need to be addressed. These included:
- Make GST registration process less burdensome
- Tax net still too narrow, meaning less revenues and more distortion. Many key supplies, including petroleum, real estate and electricity are exempted. A petrol GST proposal will be considered in September 2021.
- There remain too many rates, and they are still regularly being cut on specific supplies under political pressure. This complicates compliance and distorts trade
- Filing and payment deadlines are repeatedly extended due to economic and admirative issues. This encourages non-compliance and fraud. More resolve in holding to deadlines is needed to bring certainty
- The GSTN needs to do more to encourage the adoption of technology to improve collection efficiency and reducing tax evasion. Too many smaller taxpayers are manual.
- Centre has been slow recently on paying 5-year compensation (see below), straining relations
March 2022 India state five-year compensation period end
As part of the simplification of Centre and States’ indirect taxes into a single GST in 2017, the 32 states were given a five-year parachute compensation scheme. This ends on 1 March 2022. However, the States are already claiming COVID-19 has disrupted this forecast and the compensation period should be extended.
The vision was that GST revenues would grow adequately between 2017 and 2022, including an ongoing widening of the tax base and improved compliance through digitisation, for the States to be covered.
It is unlikely that the Centre will extend the period. It could instead look at zero-rating GST compensation to protect States’ revenues.
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