GST 2023: Simpler Rates And Legal System Is Much Awaited

On the eve of July 1, 2017, at the central hall of the parliament, Prime Minister Narendra Modi launched the Goods and Services Tax. In his address he described the indirect tax reform as 'Good and Simple Tax.'

While the origin of the catchphrase goes further back, it stuck. Five years later, while the reform has garnered a steady monthly collection of Rs 1.4 lakh crore, new challenges have cropped up.

As Finance Minister Nirmala Sitharaman gets down the preparing Budget 2023, the last full-year budget before the country goes to polls in May 2024, two key pending requirements under the GST are an appellate tribunal and further rate simplification.

Over the past year, the GST council has met twice. Major decisions like partial rate rationalisation, decriminalisation of minor offences, procedural changes like e-invoicing, and interpretational clarifications have been issued.

A former Finance Ministry official in the know told BQ Prime that the agenda at the beginning of FY23 was to engage in deeper level scrutiny and audits, wherever necessary.

In 2022, the department shifted focus to scrutiny as the window for assessing past returns was closing, the source said. BQ Prime had learned in April 2022 that the department had looked at 35,000 cases pertaining to FY18 for mismatches in filing as the five-year window for assessment was closing.

Scrutiny involved validating the self-assessment returns with analytics, following which the taxpayers were selected on a specific basis for verification. A more intrusive compliance step is the audit, which involves not just verifying tax declarations but matching them with the taxpayer's business financial records like their annual turnover, payments, receipts, etc.

In the coming fiscal, the department will likely sharpen its focus with better targeting and selection of taxpayers who display high-risk behaviour, the source said.

Another challenge for 2023 is ensuring revenue growth as the compensation to states has ended. At some point, rate rationalization will have to be achieved, the source added.

The need for simplification and a reduction in the number of tax slabs has been widely discussed. The decision now rests with the 'Group of Ministers on Rate Rationalisation,' headed by Karnataka Chief Minister Basavaraj Bommai. Former Revenue Secretary Tarun Bajaj had also stated previously that India needs fewer slabs. Currently, excluding the special slab on certain items like gold, there are 5 rates: 0% or NIL rate, 5%, 12%, 18%, and 28%.

MS Mani, partner at Deloitte India, told BQ Prime that the GST system can do with one fewer tax slab. "The major rate for corporate India is 18%. Almost all items pertaining to them fall under that slab. There are few items on the 12% rate, and they could be rationalised to merge with another tax slab," he said.

Bipin Sapra, Partner at EY, said any rejig will have to keep revenue considerations in the balance.

"18% can be seen as the focal rate. If the GST Council considers merging the 12% and 18%, then they may have to consider raising lower slab or include more items from the NIL rate to maintain the revenues," he said.

However, there are issues that still need to be addressed.

"The GST Council has been responsive, making changes in rate and rate structure. However, these changes are often reactive and what is needed is a long-term vision," Sapra said. "There are still industries like restaurants and hotels where either the whole credits cannot be availed or a lot of cost gets built up in the transaction flow."

Sapra suggests a sector-level approach.

"A sectoral approach can help identify inverted duty, evasion-prone commodities, non-availability of credit and the difficulty of taxation of certain sectors," he said. "This could also point which sector is more prone to fake invoicing and where more vendors are not GST compliant."

The question we must be asking is: what can be done through the GST to aid GDP growth and improve the ease of doing business?, according to Mani.

"Corporate India is burdened with numerous filings; there is a need for more leeway for pan-Indian companies to do fewer filings," Mani added.

Let's take an example: XYZ is a company with branches in all Indian states. GST mandates that a separate return be filed in each state/place of supply. This means XYZ will have to file 28 returns each month and 336 returns in a year.

"A large organisation typically has one set of accounts. But the GST requirement necessitates a profit and loss account for each state. This is neither required from an accounting perspective nor from an income tax perspective," Mani explained.

Banks, software, insurance companies, and all other service providers, other than manufacturers, face this, Mani said.

Drawing parallels, he said unlike GST, income tax return filing requirements are at legal entity level. "Providing an option for pan-India filings in GST, especially for service providers, would significantly ease the compliance burden in GST."

Along with fewer forms, a simplification of the forms must also be explored, Sacchidananda Mukherjee, professor at the National Institute of Public Finance and Policy, told BQ Prime.

"The next generational reform could be simpler forms. GST is a compliance-intensive system. My suggestion would be to simplify the system and reduce the number of forms. Just keep GSTR1, 2, and 3, wherein 3 will be auto-populated from 1 and 2," Mukherjee stated.

Mukherjee also hopes for a common advance ruling authority. Currently, under the GST, an advance ruling can be obtained on a proposed transaction as well as a transaction already undertaken by the appellant. But the ruling is limited by state boundaries and to that particular transaction.

This underscores the urgent need for an appellate tribunal. "If we want to move forward with GST and its simplification, there needs to be a common dispute resolution authority," he said.

The GST GoM on Appellate Tribunals submitted its report to the council, and the subject was to be voted on in the 48th GST Council. However, the topic was deferred at the last council meeting on Dec. 17th.

Dispute resolution serves as both a taxpayer service as it offers a resolution mechanism for taxpayers and also points toward policy-level corrections that may be needed.

Saurabh Kanchan, also a tax partner at Deloitte, noted that all sectors of the economy need to be integrated into the GST system.

Fuel, liquor, electricity, and stamp duty on real estate are currently outside the purview of the GST. Fuel includes natural gas, petrol, diesel, petroleum crude, and aviation turbine fuel.

"Liquor, energy, and fuel need to get integrated into the GST system. They are widely used by industries that cannot currently claim ITC for them. There is still a cascade of taxes that happens on account of these, which are embedded in the price of products and services," Kanchan said.

According to the RBI's study of Budgets 2020–21, excise duty on fuel makes up about 18.4% of the Center’s gross tax revenues. Petroleum and alcohol, on average, account for 25–35% of states’ own tax revenue.

In a tabled response in the monsoon session of the parliament, the finance ministry clarified that bringing petroleum products into the GST ambit would require a recommendation from the GST council.

"The Council may consider the issue of inclusion at a time it considers appropriate, keeping in view all relevant factors. At present, petroleum products are not covered by GST, and no recommendation has been made so far by the GST Council," it said.