Indian GST: Implications, Intricacies & the way forward

[Dhwani Mainkar]

An important component of the good tax system is a comprehensive Goods and Services Tax (GST).[1] The promulgation of GST in India was a giant leap towards the direction of establishing an effective or rather ‘good’ structure & framework of indirect tax laws in India. The 101^st Constitutional Amendment Act, 2016 paved way for transitioning into the GST Regime, with a ceremonious launch in the Central Hall of the Parliament at midnight on 1^st July, 2017, an occasion which merited a midnight session of the Parliament which was described as ‘a commendable & the single biggest tax reform measure’ undertaken in Independent India and is considered as a significant achievement which marks the beginning of a new era of indirect taxation.  It has been acclaimed to be ‘revolutionary overhaul’ of the erstwhile prevalent Indirect Tax System in India by subsuming 17 Central and State Levies and almost 23 Cesses.[2] On its third anniversary, it is of paramount importance to review while thoroughly taking a stock of these claims and critically analysing whether this tax reform has sought to actually sift the meaningful changes from mere empty sloganeering. This Article shall endeavour to analyse the successes and the failures of the GST regime in the three years of its implementation & shall strive to briefly lay down a roadmap to suggest a plausible way forward.

Salient Features of GST: Bridging the Gaps of the Erstwhile indirect tax regime:

The earlier origin-based indirect regime involved the levy of multiplicity of varying taxes, exemptions and tax penalties on different stages of the production and distribution of a product[3] coupled with the anomaly of cascading effect of taxes & double taxation, thereby imposing a prominent bar on the cross-utilization of credit towards discharging tax obligations. In an attempt to effectively redress these challenges, the transition into GST was an imminent necessity. An effective tax system is one that not only minimises the compliance burden of the tax payer but also simultaneously achieves the revenue targets in an equitable manner. The prime salient features of the dual Indian GST are relevant to be studied here:

1. Consumption- based Destination Tax: In order to trigger GST, the taxable event is ‘Supply’[4] while taxability is ascertained primarily on the principle of ‘Place of Supply’[5] as envisaged under the provisions of the Integrated GST Act, 2017. Thus, the concept of Supply subsumed under its ambit the various earlier prevailing tax incidences such as sale, manufacture, provision of services, entry of goods, etc., as a comprehensive move to ensure uniformity. The revenue is apportioned to the consuming State.

2. Seamless Flow of Input Tax Credit[6] – An integral aspect of GST is imposing tax only on the ‘value addition’ & providing a set-off against the taxes paid on inputs, thus ensuring a seamless chain of credit and striving to achieve a reduction of costs.

3.  Digitalization: Unlike the VAT & Excise regime, which had a dubious element of a manual interface with the revenue authority, the entire system of tax administration under GST is technology driven right from registration, returns, applications for letters of undertaking to facilitate exports, generating E-way Bills[7] for movement of goods, faceless e-reply to show cause notices to filing refund claims. With the scheduled advent of e-invoicing mechanism in October 2020[8],  this digitalisation shall receive an augmented boost thereby promoting a green & eco-friendly methodology of doing business.

4. Invoice- matching & auto-population of returns on GST Network (GSTN): This novel mechanism ensures a system of ‘self-policing’ and checks evasive practises.

5. Special regard to the nuances of MSMEs: The Composition scheme[9] for small taxpayers up to an aggregate turnover of 1.5cr with reduced quarterly compliances as well as minimized documentation requirements in the form of a ‘bill of supply’ have been specifically envisaged for the MSME sector.

6. Significant attempts to Rationalize rates & facilitate the ease of doing business: With about 40 meetings of the GST Council in the last three years, proactive steps have been taken to achieve the objective of a revenue neutral rate by rationalising the rates of various goods & services and significantly reducing the number of items under the highest tax bracket of 28% from approx. 225 in 2017 to merely 28 luxury & demerit items in the beginning of 2020![10] Further, the effort of the CBIC to notify time extensions in filing returns or waiver of penalties & late fees cannot be discounted, especially during the Pandemic. The Executive has been striving to steer clear the procedural lapses time and again.

7. Display of Pooled Sovereignty: Our Late Hon’ble ex-Finance Minister, Mr. Arun Jaitely described GST Council as, ‘India's first federal structure where states and the Centre have displayed an exemplary spirit of  pooling in their sovereignty’, a constitutional body[11] having joint representation from the Centre & States for recommending the mandate on all encompassing matters pertaining to GST. Further, the conferment of a simultaneous taxation power on Union and the States vide Art. 246A[12] is termed as cooperative federalism.  

8. GST has been in consonance with the international taxation norms: It is an internationally acclaimed regime which has been implemented by almost 160 countries globally which is para materia to a consumption based uniform tax system and India’s step to introduce GST has brought it at par with the international community on its indirect taxation front.

The realities vis-à-vis the promises: an introspection

As the significant features of GST have been elucidated hereinabove owing to the widened tax base under this regime. There were certain further claims made by the Government that the implementation of GST would contribute to boosting the economy, minimized tax compliances, integrate national market and be a cumulatively beneficial regime to taxpayers as well as the administrative authorities.[13] At this juncture, it is crucial to study whether these claims and objectives have been realised in actuality. Are there any trade-offs involved in the implementation of GST?[14] Further, this necessary deliberation is not to disregard this tax reform, but to suggest ways to ensure an effective tax regime in the nation. This dissonance has been envisaged in the following points:

1. A Saga of Divergent Advance Authority Rulings[AARs]: Owing to the complexity & newness of the GST Regime, there has been a brisk inflow of AARs trying to seek clarifications & obtain certainty about the implications & tax landscape. However a worrisome trend has been observed wherein the AARs of different states are diverging in their opinion on the same subject thereby being instrumental in posing crucial concerns for the industry & trade. The sheer lack of certainty and persistent inconsistency in adjudging significant principles of law has severely endangered the mantra of ‘One Nation One Tax’. To substantiate this argument, reliance is placed on the divergent stands taken by the Maharashtra AAR in Giriraj Renewables Matter[15], the Karnataka Advance Ruling[16], and the ruling laid down by Uttarakhand AAR[17] in the context of the relevant tax leviable on solar power plants. The prime issue dealt with therein concerns whether these solar power projects would be classified as  ‘works contract’ attracting tax @ 18% or ‘composite supply’ attracting tax @ 5%. Further, in the rulings of M/s Macro Media Digital Imaging Pvt. Ltd.[18] and Photo Products Co. Pvt. Ltd.[19]  primarily pertaining to the tax implications on printed advertisement materials, the Advance ruling Authority of Telangana and that of West Bengal gave contradicting rulings, while laying down their deductions on completely divergent rationales .

2. Absence of an Appellate Mechanism: The GST Appellate Tribunal [GSTAT]: Chapter XVIII of the CGST Act, 2017 envisages a comprehensive machinery for dispute resolution with specific provisions for Appeals & Review. Section 109 has entrusted the power on the Central Government to establish, a GST Appellate Tribunal on recommendations from the GST Council, as a body for hearing appeals by aggrieved parties against the orders passed by the lower authorities[20] Despite claims and plans of establishing an Appellate Tribunal, such a body has not yet been established, thereby adding to an air of uncertainty for the industry & trade.

3. Incessant Technical Glitches on the GSTN Portal: A robust IT Infrastructure is essentially the backbone of a digitalized tax compliance system. However, the taxpayers face several issues such as inadvertent crashing of the portal while filing returns, persistent errors of validation while uploading supporting documents, inability to save data on the porta or loss of filled information on the GSTN portal, etc. The revenue authorities are well conversant with these portal glitches and hence they have time & again extended the compliance due dates of GST. This digital infrastructure needs to be strengthened on priority to make this regime full proof. The initially claimed digital return outline constituted of three returns GSTR-1, 2, and 3, but the lack of digital preparedness of the GSTN portal lead to the inadvertent deferral of GSTR-2 and GSTR-3. These instances are ample proof of the prevalent ‘work-in-progress’ of the GSTN Portal. Further, the MSMEs have found to be complaining about the cumbersome & tedious return filing process.

4. Delayed Refunds: The refund sanction process suffers from the vice of laxity and there is a dire need to expedite this process in order to address the liquidity crunch confronted by business houses.[21]

5. Rampant Evasion: As against the claims of inflation control & revenue maximization, there is an estimated mismatch of ₹ 34,000 crore tax liabilities reported in GSTR-1 and GSTR-3B until April 2020[22]. The discrepancies in tax returns, invoice mismatching on GSTR-2A return, bogus firms, fake invoices and e-way bill failure warrant stringent measures for tackling this menace of rampant tax evasion. [23] In March, 2020 , importantly, the Delhi Commissionerate of the Anti-Evasion wing of Central Tax Department has unearthed a tax scam worth ₹ 7, 896 crore involving fake and dubious credit invoices.[24] Further, the CAG report explicitly stated “complex filing mechanism, glitches in IT infrastructure, inadequate safeguards, leakages, frauds and many implementation issues, leading to a slowdown in GST collections”[25] Iron & steel units of Telangana have been under the scanner of the GST officials for alleged instances of circular trading wherein they indulged in suspicious high worth transactions with shell companies, wherein cash was withdrawn without any corresponding proof of supply.[26]

6. Credibility of the National Anti-profiteering Authority [NAA] is at stake: The National Anti-profiteering authority has been criticised for its arbitrariness & vagueness, without any concrete mechanism in place for its functioning, and is vested with wide powers to de-register businesses in case of failure to pass on the benefit of seamless ITC. In the case of Jubliant Foodworks[27], the Hon’ble Delhi High Court has passed a stay order on the stand taken by the NAA against the company owing to the fact that there was prima facie case for the in discrepant methodology to determine profiteering.[28]

7. Inadequate GST Collections: The revenue collections of GST have not been able to meet the targeted figure. Initially in 2017, the prime reason for such low collections could be attributed to allocating a huge number of goods in the highest tax bracket of 28%, & subsequent tax cuts without parallel reduction in the collection targets. The other reason inter alia evasion would be low compliance rate. Despite the Finance Ministry’s downward revised collection targets approximately totalling to ₹ 21.6 Lakh crore, the poor GST Collections of merely ₹ 97,500 Crore in the month of March 2020 are significant to substantiate the fact that the Government is struggling to meet the requisite revenue targets.[29] Further, in the months of the Lockdown owing to the pandemic, the collection for April was ₹ 32,294 crore and ₹ 62,009 crore for May[30]. The revival of the economy in this phase of the unlock restrictions is of paramount importance and the same is evidenced by the June 2020 collections of approx. ₹ 90cr, though better than the previous two months, yet lower than the initial targeted revenue of ₹ 21.6 Lakh Cr of Feb-March 2020.

The way forward

While there have been crucial & necessary changes brought in the Indian fiscal scenario by implementing the GST regime, as elucidated above, there are pertinent concerns that plague the ‘new era’ of indirect taxation. Essentially, this has to do with technological difficulties in filing mechanism, tedious pre-requisites that disproportionately impact MSMEs, lopsided impact on low-income households, lack of uniformity & certainty in the tax administration, a yet-to-be established appellate mechanism and weak IT infrastructure. As the GST era steps into its fourth year since its inception, the Government should look at addressing each & every challenge highlighted above as well as endeavour to implement the additional suggestions put forth hereinbelow:

1. An expedited Audit Mechanism for Scrutinies & Assessment: It is unfortunate that despite three years of its implementation, the revenue authorities have not initialized and commenced the Departmental Audits. The point of concern remains that the date of filing Annual Returns for the initial financial year of 2017-18 were being incessantly extended owing to technological issues and hence the corresponding delay in Audits. Timely scrutiny & assessments shall keep a counter check on the evasive strategies of the businesses and make them accountable, thereby augmenting the revenue. This is coupled with the need for simultaneously empowering the anti-evasion machinery [Directorate General of GST Intelligence] to ensure utmost regularity in tax collection.

2. A strengthened digital platform with prompt implementation of the deferred of the much needed transparent e-invoicing mechanism which reflects the miniscule details of B2B transactions and is inclined towards strengthening the seamless flow of ITC. This new mechanism may possibly hold the evaders accountable for their instances of bogus invoices & circular trading, thereby establishing a relatively neutral & stable credit flow.

3. Address instances of ‘Inverted Duty Structure’ : Owing to the accumulation of ITC in cases where the output tax liability is lower than the input tax on raw materials, leads to a situation of liquidity crunch and these issues are predominantly confronted by the Pharmaceutical industry and for exporters whose supplies attract zero rated tax. The Council should pay heed to this sensitive issue especially while boosting ‘Make in India’ schemes, high infrastructural development activities and for export thrust areas to ensure early disbursement of refunds in such cases or strive to rationalize the thrust structure itself by re-visiting the rates of final products vis-à-vis the inputs.  

4. Implement Compliance Rating Mechanism: Section 149 of the CGST Act, 2017 envisages the GST compliance Rating Mechanism, which acts as a medium to acknowledge the regular & honest tax payers for their consistency, promptness & regularity in tax compliance. It was incorporated with an objective to give the necessary boost to the Suppliers, however it still lacks implementation.

In conclusion, it may be noted that these three years of GST regime in India can be summarized in one line as a melange of  seized and missed opportunities. In the difficult times of the pandemic, the Government did the best it could to strive to accelerate refunds, ease the compliance deadlines, initiate SMS return filing facilities, waive penalties and late fees. In my opinion the constructive suggestions and recommendations put forth above could endeavour to steer clear this regime of certain major criticisms and bring it at par with the international jurisdictions. As Chanakya stated that the best taxation regime would be the one which is “liberal in assessment and ruthless in collection” in his book Arthashastra, the GST regime should strive to align its track similarly in a constructive pattern to truly realize the goal of ‘one nation, one tax, one market’.

[1] Rao, M. Govinda & Kumar, Sudhanshu, 2017. "Envisioning Tax Policy for Accelerated Development in India," Working Papers 17/190, National Institute of Public Finance and Policy. <https://ideas.repec.org/p/npf/wpaper/17-190.html#:~:text=The%20objective%20of%20the%20paper,growth%20and%20development%20in%20India.>

[2] GVL Narsimha Rao, 2017. “GST in Modi’s new India: This revolutionary tax reform will yield greater revenues and accelerate economic growth”, The Times of India, <https://timesofindia.indiatimes.com/blogs/toi-edit-page/gst-in-modis-new-india-this-revolutionary-tax-reform-will-yield-greater-revenues-and-accelerate-economic-growth/>

[3]Differences between GST and Previous Tax Structure’ (BankBazaar, 17 May,2020) <https://www.bankbazaar.com/tax/differences-between-gst-and-previous-tax-structure.html>

[4] Section 7, CGST Act, 2017

[5] Section 10-13, IGST Act, 2017

[6] Section 16, CGST Act, 2017

[7] Rule 138, CGST Rules, 2017

[8] Vide the 39^th GST Council Meeting, 14^th March, 2020.

[9] Section 10, CGST Act, 2017

[10] Jigar Doshi & Rebecca Pinto, Three years of GST: The hits & the misses, 3^rd July, 2020 <https://taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=38959>

[11] Art. 279A, Constitution of India

[12] Inserted by the virtue of the 101^st Constitutional Amendment Act, 2016

[13] Arun Jaitley says GST will benefit all: A look at India's biggest tax reform’ (Economic Times, 29 March 2017) < https://economictimes.indiatimes.com/news/economy/policy/jaitley-says-gst-to-benefit-all-a-look-at-indias-biggest-tax-reform/articleshow/57889258.cms?from=mdr>

[14] Surajit Das, ‘Some Concerns Regarding the Goods and Services Tax’ (2017) 52(9) Economic and Political Weekly

[15] IN RE : GIRIRAJ RENEWABLES PRIVATE LIMITED [2018 (5) TMI 854 - AUTHORITY FOR ADVANCE RULING - MAHARASHTRA]

[16] IN RE: M/S. GIRIRAJ RENEWABLES PRIVATE LTD. [2018 (9) TMI 1341 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA]

[17] IN RE: M/S. EAPRO GLOBAL LIMITED [2018 (9) TMI 1526 - AUTHORITY FOR ADVANCE RULINGS, UTTARAKHAND]

[18] IN RE: M/S. MACRO MEDIA DIGITAL IMAGING PRIVATE LIMITED [2018 (6) TMI 519 - AUTHORITY FOR ADVANCE RULING HYDERABAD TELANGANA]

[19] IN RE : PHOTO PRODUCTS COMPANY PVT LTD [2018 (6) TMI 38 - AUTHORITY FOR ADVANCE RULING - WEST BENGAL]

[20] S. 109, CGST Act, 2017

[21]GST Refunds Continue to elude MSMEs : No progress post FM announcement, Economic Times, 26^th September, 2019, accessed at < https://cfo.economictimes.indiatimes.com/news/gst-refunds-continue-to-elude-msmes-no-progress-post-fm-announcement/71313922

[22] Atul Mittal, Major GST Issues/problems seen across India, 15^th April, 2020, Saginfotech, accessed at <https://blog.saginfotech.com/gst-issues-india>

[23] Fake firms, fake invoices and credit fraud, how it all went wrong for GST in just two years, the Print, 16^th January, 2020 accessed at  <https://theprint.in/economy/fake-firms-fake-invoices-and-credit-fraud-how-it-went-all-wrong-for-gst-in-just-2-years/349933/>

[24] Tax Department Cracks down GST Frauds worth ₹ 7896 crore, Clear Tax chronicles, 5^th March, 2020 accessed at  <https://news.cleartax.in/tax-department-cracks-down-gst-frauds-worth-rs-7896-crore/>

[25] CAG Report No. 11/2019, 30^th July, 2019 accessed at < https://cag.gov.in/content/report-no11-2019-compliance-audit-union-government-department-revenue-indirect-taxes-%E2%80%93-goods>

[26] Top Infra, Steel companies under GST Intelligence scanner, 22^nd January, 2019 accessed at < https://www.ascgroup.in/top-infra-steel-companies-under-gst-intelligence-scanner/>

[27] JUBILANT FOODWORKS LTD. & ANR. VERSUS UNION OF INDIA & ORS. [2019 (5) TMI 568 - DELHI HIGH COURT]

[28] Damning verdict on GST’s anti-profiteering rulings, The Financial Express, 23^rd October, 2019 accessed at <https://www.financialexpress.com/opinion/damning-verdict-on-gsts-anti-profiteering-rulings/1743326/>

[29] Samrat Sharma, March GST collections below ₹ 1 lakh Cr, way behind target ; FY20 govt revenue goal at stake, 1^st April, 2020 accessed at <https://www.financialexpress.com/economy/gst-collections-in-march-much-below-target-govts-revenue-goal-at-stake/1914601/>

[30]June GST Collections Stand at ₹ 90917 crore, Economic Times, 2^nd July, 2020.  https://economictimes.indiatimes.com/news/economy/indicators/june-gst-collections-stand-at-rs-90917-crore/articleshow/76725083.cms

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- Dhwani Mainkar

(LL.M, Queen Mary University of London)