100 Days into New Indirect Tax Regime: After initial difficulties, improvements pushing GST for promising turn

The first month of the GST roll-out was smoother than many of us thought it would be. There was overwhelming support from industry (with an exception of probably textile sector), prices of many products reduced and consumers, though anxious, were willing to give it a chance. Inter-state barriers got reduced and reportedly brought down the transportation cost and time.

The government was proactive and quick to respond to challenges. Series of clarifications, press releases and FAQ documents were issued and social media was used extensively, something which we haven’t seen in the past.

However, the initial euphoria tapered down quickly and voice of protests started coming in gradually from the second month. Few critics started comparing the disruption caused due to GST with demonetisation and attributed economic slowdown to these “twin factors”. Small and medium enterprises (SMEs) argued that GST rules are complex for them to understand and also that larger customers are reluctant to deal with them. Exporters protested that their incentives have reduced and GST is leading to huge working capital issues for them. Large companies complained about the technological challenges faced with respect to GST Network (GSTN) in filing invoice-level details and other compliances.

So, did we go wrong somewhere?

The issue was not so much about the structure of GST. There is general consensus that in the long run, GST will transform the way business is done in India and lead to long-term structural changes including expansion of tax base, removal of artificial state barriers and promoting the ‘Make in India’ campaign.

However, while focusing on structural benefits of GST, perhaps the enormity of implementation challenges were not assessed properly. The first and foremost was technological readiness, both for the government as well as industry. To be fair to GSTN, it needed much more time to test the system before the implementation. The laws and rules were getting framed till the last moment, which meant that we had to implement ‘GST on the go’.

SMEs were not ready on time, partly because many of them thought that GST would be deferred further and partly because the government did not have enough time for the public outreach, certainly not to the extent this kind of reform needed. Also, few legislative provisions, such as requirement of reverse charge payment of tax on purchases from unregistered vendors, added to complexity further.

GST is fundamentally based on the principle of payment of tax at each leg of the transactions, with minimum exemptions and concessions. Among others, it also meant that exporters were required to pay taxes on purchase of inputs, which were to be given as a refund later. This led to cash flow issues for the industry and lack of clarity on the timelines and process of refund process aggravated the situation. Exporters saw a surge in their costs and slowing international market meant sudden dip in demand.

The emphasis of the ease of doing business was not as prominent as it should have been and multiple tax slabs, large number of filings and additional documentation requirements (such as furnishing of a bond or letter of undertaking for all exporters) meant that GST was a ‘good’ tax but not as ‘simple’ as we thought it to be. It was evident that to accommodate various states as well as the Centre, GST laws were tweaked significantly from what was envisaged earlier.

Administering such a law, in a country of 1.2 billion people, is not easy. The fact that there is no other country in the world which has a dual system of taxation at such a scale also means that there is limited scope of learning from international experience.

However, it is reasonable to predict that we can only get better with experience.

In addition to strong industry support and GST being a “tried-and-tested” system of taxation, another most promising reason for this optimism is the way the GST Council has been functioning over the past few months. Not many had expected that a body comprising different political interests would be so swift and flexible to respond to the implementation challenge and would be able to take all decisions by consensus.

The last GST Council meeting saw some far-reaching measures focused largely on SMEs and exporters. Increasing the threshold limit under the composition scheme, providing upfront GST exemption on purchases for exporters and reduction in tax rates on several commodities/services when tax collections are yet to stabilise are not easy political and economic decisions. It shows that the governments (the Central as well as states) are not only aware of the on-ground challenges but are willing to do what it takes to smoothen the system. It might sound too good to be true, but this true co-operative federalism is the biggest reason that GST holds a lot of promises and the results would be visible — slowly but surely.