January 16, 2018

India’s seminal tax reform is bracing for fresh disruptions as the government prepares to roll out the next steps

The goods and services tax (GST) crosses a milestone on Tuesday when it clocks 200 days. But, as insiders and experts argue, the new tax regime is bracing for fresh disruptions as the next steps in the seminal reform are rolled out.

Especially since Indian industry—particularly small and medium enterprises—is still grappling with frequent changes in the tax and demanding compliance requirements. Presumably these challenges will dominate the deliberations of the GST Council, which will assemble in the capital on 18 January for its 25th meeting.

The challenges

A big concern has been the failure of companies to pass through the benefits of the reduction in tax rates to consumers. Although companies such as Apple Inc., Hindustan Unilever Ltd and Hero MotoCorp. Ltd reduced prices of some of their products, an across-the-board cut is yet to be seen.

On the other hand, lenient oversight in the first 200 days and deferment of key steps such as the e-way bill (which carry details of goods being transported) to check tax evasion have led to massive revenue leakages, in turn resulting in falling tax collections for the government. The fact that the government will get only 11 months of indirect tax revenue this fiscal adds to the concerns of the exchequer.

Political compulsions have forced the GST Council to undertake a reduction in tax rates, which also squeezes revenue receipts. Tax revenues fell sharply to Rs80,808 crore in December from Rs94,063 crore in August—the first month of tax collections. This has raised the risk of the Union government breaching its 3.2% of GDP fiscal deficit target this fiscal year.

Disruption alert

Massive changes are on the anvil to address tax evasion and to further simplify the tax code, especially classification of items.

The GST Council—the federal body comprising Union finance minister Arun Jaitley and state finance ministers—decided to move up the roll-out date of the e-way bill system by two months to 1 February after detecting instances of widespread tax evasion; this loss is estimated at around Rs30,000 crore.

An e-way bill will have to be generated for all movement of goods—within or outside a state—amounting to more than Rs50,000 by prior online registration of the consignment. The supplier and the transporter can upload the details about the shipment and get a unique e-way bill number.

As the implementation date nears, the industry is worried about harassment by tax officials and in effect a disruption to the free movement of goods within India.

The reverse charge mechanism, which requires big businesses to pay tax while making purchases from an unregistered dealer, and the process of invoice matching will also be implemented in the next few months.

Industry resents the hasty implementation of the tax without adequate time for the back-end GST network and hopes that the experience is not repeated in the implementation of the e-way bill.

“The experience so far has not been great. There have been changes every now and then. Further, experience of businesses with regards to compliance has not been good on the ground. Realistic reduction in prices has still not come in and may take some more time. We should be able to gauge the impact of GST by March or April,” said Suresh Nandlal Rohira, a partner at Grant Thornton India LLP.

“Going ahead, the service industry wants the match-and-mismatch concept under return filing to be done away with. Further, any challenges with respect to systems of e-way bill should be addressed to ensure there are no hiccups unlike the initial problems faced while filing tax returns. Octroi check posts are being done away with but they should not be replaced by mobile check posts,” he said.

Further rationalization of rates should also be looked into, he added.

With expectation of a further simplification in the returns process and a possibility of combining some of the return forms, industry is also bracing for another round of changes under the new indirect tax regime, which was implemented on 1 July.

“Industry has to prepare its systems for invoicing, filing tax returns and claiming input tax credit. E-way bill introduction will increase compliance requirements,” said Archit Gupta, chief executive officer of Cleartax.in, which has ventured into helping firms file their tax returns under GST.