Four Years Of GST - What Can India Do To Improve GST Efficiency?

Four years ago today, India made history by launching the Goods and Services Tax under its One Nation, One Tax agenda. Overnight, the Goods and Services Tax changed the way indirect taxation was perceived within the country. These last four years have seen the Goods and Services tax gain steady momentum as more and more taxpayers come under its ambit, to the point that the rollout of the indirect taxation system is considered a milestone in India’s economic history. This article shares insights into what can be done to improve GST efficiency in India before it reaches its fifth birthday. 

We have extensively written about the journey of the Goods and Services Tax from 2017 to 2020. But the last year has been unlike any other. The Coronavirus pandemic and consequent lockdown have resulted in large scale business interruptions over the past year. Although several relief measures were introduced under the Atmanirbhar Bharat Abhiyan, the second wave of the pandemic has left businesses in the country feeling worse for wear. The Centre also announced several tax relief measures in the 43rd GST council meet in light of the second wave of the Coronavirus pandemic and taxpayers can breathe in relief after this leeway. But even as the relief measures have rolled out and the revenue collection numbers have seen their lowest of lows and a steady couple of months here and there, the question of whether or not GST in India is a success, still hangs. The answer to that question is that GST in India is still a work in progress. What can we do to improve its efficiency? Let’s find out. 

What can be done to improve GST efficiency in India? 

Reduce giving into demands for rate cuts 

GST rate cuts, while appealing at first, are eventually going to lead to a vicious circle of tax evasion and tax fraud. They are also likely to create a value chain distortion as GST captures value addition at each stage of production. This means the credit of the tax paid at earlier stages in the chain offsets the tax on the subsequent stage. Simply put, a rate cut or an exemption at a previous stage of the manufacturing chain will lead to the carry forward of the tax creating a distortion in the value chain. Additionally, a demand for a rate cut doesn’t guarantee a reduction in pricing. Over the past four years, several cases of anti-profiteering have come to light even after GST rates were reduced. This means the end consumer doesn’t really benefit from the rate cut. 

Reduce waiver of interest rates and penalties over unpaid tax returns

While some businesses are struggling to file their tax returns and could do with a tax waiver or a reduced rate of interest on late filing of tax returns, there are tax relief measures that reduce the interest rate of returns going as far back as 2017. This refers to the latest Amnesty Scheme introduced by the Centre. If a reduction in the rate of interest or waived penalties become a pattern, taxpayers will simply not file their returns in time and keep waiting for the Centre to announce relief measures. This keeps increasing the tax burden and deviates from the Government’s projected revenue numbers. 

Improving efficiency of revenue collection 

As deadlines to file tax returns keep getting extended, there is likely to be a rise in tax evasion schemes. There is an urgent need to bring about stringent measures that will not only curb tax evasion but will also help improve the efficiency of revenue collection processes. 

Encouraging the use of the right tax technology 

One of India’s biggest pain points has been the implementation of technology in the taxpayer’s tax operations. As a rule of thumb, most taxpayers have been accustomed to manual tax operations - this inevitably leads to human errors, increased instances of data reconciliation and delays in release of tax credit. The Goods and Services Tax has been actively introducing new reform measures that are technology led, in line with the country’s Digital India initiative. This means more businesses have no choice but to switch to tax technology to manage their tax operations. The pandemic has proven to be a learning curve for adapting technology and more businesses are starting to see the benefits of adapting to and integrating tax technology in place of their manual tax operations. While taxpayers are slowly and steadily adapting to technology it is also important for the Centre to introduce technology in other aspects of tax operations including improving collection efficiency and reducing tax evasion. 

As India attempts to bounce back from a slightly more manageable economic crisis than the one witnessed in the first lockdown, the expectations from the Goods and Services Tax will be much more. 

Streamlining AAR rulings 

The Authority for Advance Rulings are independent State appointed benches that help interpret GST laws. However, these quasi judiciary committees need to streamline their interpretations and operations mainly because of the several instances of contradictory rulings. 

Bringing exempted goods under the GST ambit 

Even four years later some goods and services like petroleum, electricity, real estate etc are not under the GST ambit. These goods and services continue to add to inflation across the country and lead to a substantial loss in revenue collections. 

India’s largest indirect tax is still in its teething years and that means there is plenty of room for improvement. The use of tax technology and the fact that taxpayers are being encouraged to go digital with their taxes is a sign that India is working to keep up with its growing business capacity.