With GST, the Government of India set itself a very ambitious task. The first 50 days were a never-ending ordeal for many, especially, the small businesses and individuals. There are also plenty of roadblocks ahead. Yet, the overall sentiment remains positive.
It has been a harrowing time for some of us since GST rolled out. The small businesses, individual professionals, consultants and self employed, who by virtue of just crossing the exemption threshold of Rs 20 lakh came mandatorily under the GST regime, have been under much duress. For others too, it took some understanding. There was a lot of confusion in absence of established processes. Everyone was new to it – from you and your chartered accountant to the government.
However, you have a GSTIN now and thereby start the thrice monthly mandatory filing process – an expensive affair for small entities that need to hire a full time consultant to manage this confusing affair. The only people who seem to be laughing all the way to the bank are the CAs it seems! That, in sum, is the experience of many of us grappling with the reality of GST. It was comforting then to find experts and the media forecasting a positive outlook for the new tax regime on the completion of 50 days of GST. Undeniably, it has been tough so far, but the fact that this mammoth exercise spanning a nation of more than 1.25 billion diverse people and aiming to transform the country’s financial culture, had actually taken off despite concerns and predictions to the contrary is in itself a commendable feat. The hiccups notwithstanding, GST has evolved at a fast pace, modifying and improving along the way based on stakeholder interactions, taxpayers’ feedback and with the successive GST Council meetings acting upon recommendations and suggestions received, tweaking rules, modifying taxes and introducing new features along the way.
GST is evolving. Yet, in just 50 days it saw 58.53 lakh taxpayers out of total 72.33 lakh migrating to the GSTN, even as 13.80 lakh taxpayers are yet to complete the procedural formalities to migrate. Up to August 29, 18.83 lakh new taxpayers had registered with the GSTN. The total revenue of GST paid under different heads for July stands at Rs 92,283 crore, the total CGST revenue is Rs 14,894 crore, SGST revenue totals Rs 22,722 crore, IGST revenue is Rs 47,469 crore (of which IGST from imports is Rs 20,964 crore) and cess totals Rs 7,198 crore (of which Rs 599 crore is compensation cess from imports). As Dr Saurabh Agarwal, Professor of Accounting & Finance & Dean, Indian Institute of Finance, summarises, “The numbers indicate that GST has been successful in registering new taxpayers and in bringing buoyancy in revenue collection.”
But could the roll-out have been smoother?
Sumit Dutt Majumder, Ex-Chairman, Central Board of Excise and Customs, author of Know Your GST – GST Unraveled, columnist and customs & GST expert, thinks so. “GST should have been implemented only after the GST Net, the IT infrastructure for facilitating implementation of GST, was well tested with interactions with taxpayers and taxmen in all the business processes like migration, registration self assessment and payment filing of returns and matching of invoices and refund claims.” The test runs could not take place and as a result, the GST Net was not fully operational on July 1, the day of the roll-out. However, Majumder does not blame GST Net for the glitches. “Since all the rules relating to the GST process could only be released in the last fortnight of June, therefore, there wasn’t sufficient time for GST Net to become fully operational,” he says. Consequently, the excel sheets for uploading invoices were missing as were certain other basic e-facilities. To add to these woes were the disruptions in the system brought on by the last minute rush for migration.
The state of unpreparedness was such that chartered accountants, who became the go to people for the majority under GST, as well as many tax experts, were also unaware of the new tax system during the first 50 days. Expectedly, GST has been smooth sailing for large companies prepared with technology, systems in place, and in-house experts. But the small vendors were left stranded. What is more worrying is “the pace at which the small businesses learn and adapt to the IT based tax system is still low,” as Agarwal rues. With more than 51 million SMEs in India, the implementation of GST has been an uphill task. “The MSME sector was the worst affected as they did not have the IT infrastructure,” says Majumder. These small and medium enterprises had depended on the services of the GST Suvidha Providers (GSPs) – supposed to be the link between the taxpayers and GSTN. Because the GSTN could not provide the application software to the GSPs for interacting with the GSTN, a large segment of small business were left without a recourse.
Majumder argues that though the government had the option of deferring GST by two months to September 1 and carrying out the test runs, it chose to go by the argument that even at a later date there would have been glitches and it was better to roll-out GST as per schedule on July 1. This would give people the time to settle down in the new regime, it felt. However, the GST expert is not willing to “buy this argument” and adds that “full preparedness of GSTN was the sine quo non for starting GST.”
• Compliance costs will fall: GST will replace 17 indirect taxes. This model is a single tax model and tax on tax will be removed so that levies and compliance costs will fall down. So the life of common people will get simpler.
• Prices and rate of tax will be same: After the implication of Goods and Services Tax Act, India will be a one market. All the products and services will be provided at same price in all the states. The rate of tax will be same all over India. This is the biggest advantage of GST Bill in India.
• Multiple taxes will be removed: Biggest benefit will be that multiple taxes will no longer be present like octroi, central sales tax, state sales tax, entry tax, license fees, turnover tax etc. and all that will be brought under the GST.
• Transparent and corruption free tax system: GST is a transparent and corruption free tax system. With GST implementation a business premises can show the tax applied in the sales invoice. Customer will know exactly how much tax they are paying on the product they bought or services they consumed.
• Cost of doing business and production cost will be lower: GST is beneficial for both economy and corporations. It will not be acost to registered retailers, therefore, there will be no hidden taxes and the cost of doing business will be lower. This in turn will help export being more competitive.
• Tax burden will be divided equally: Under Goods and Services Tax, the tax burden will be divided equally between manufacturing and services. This can be done through lower tax rate by increase tax base and reducing exemptions.
• Economic growth: GST is structured to simplify the current indirect system. It is a long term strategy leading to a higher output, more export, more employment opportunities and economic growth. According to experts, by implementing the GST, India will gain $15 billion a year.
• Tax evasion will be minimised: This system will affect the tax evasion and theft of tax will be minimised as it is easy to track.
• Economic distortions will be removed: GST will be levied only at the final destination of consumption based on VAT principle and not at various points (from manufacturing to retail outlets). This will help in removing economic distortions and bring about development of a common national market.
• Tax collection at the point of sale: In the GST system, taxes for both Centre and state will be collected at the point of sale. Both will be charged on the manufacturing cost. Individuals will be benefited by this as prices will come down and lower prices mean more consumption, and more consumption means more production, thereby helping in the growth of the companies.”
Given the practical difficulties faced by the small businesses and professionals, there is merit in Majumder’s assertion that the two-month deferment would have brought about qualitative changes and perhaps people would have been saved the “extensive difficulties” they had to face. GST has been a trial and error method so far and while some experts feel this open learning process is the best, for others like Majumder, “the notifications and circulars that kept flowing throughout the months of July and August” only complicated the matter as taxpayers were required to make “continuous adjustments”. The modifications were based on the recommendations received by the GST Council from various industry bodies, government bodies and public opinion. But others like Agarwal defend the changes as being citizen oriented. “In some of the modifications the GST rate was lowered to be more accommodative,” he says.
“Amid all this confusion, the Central Board of Excise and Customs, particularly the GST wing, played yeoman's role, creating awareness about the new Act and rules. It continuously provided answers to frequently asked questions from taxpayers.”
— Sumit Dutt Majumder
Suresh Nandlal Rohira, Partner, Grant Thornton India LLP views the refining process as “an approach which aims to improve and smoothen the implementation of the new tax regime”. Certainly, as he says, it would take time for the economy to reflect the efficiency and also for the industry participants to reap the benefits of GST. “Hopefully, the refining process would limit to modifications on the implementation and on the compliances and no factual or definitive concepts would be hampered with.” We echo his concern. Agarwal supports Rohira’s view saying, “Continuous improvement is a desirable feature and hence everything could not have been taken care of before the GST roll-out. Dynamic approach has been adopted in the GST tax system and hence assessees need to be on their toes to regularly monitor updates with respect to GST.”
Yet, the transition could have been smoother, agrees Rohira. But then again as he says, in retrospect “looking out for what could have been done to avoid these issue as on date is comparatively an easy task when compared to actually predicting and overcoming it at the very beginning”. What is more pertinent now is that there are still transitory issues, which are technically unclear and the industry is hoping the department would not take harsh steps due to no clarity over it, shares Rohira. Though optimistic that “the entire GST hardship is expected to bear fruits in future”, Agarwal too concedes that the roll-out has been a bumpy ride for both – the government and the businesses.
“Continuous improvement is a desirable feature and hence everything could not have been taken care of before the GST roll-out. Dynamic approach has been adopted in the GST tax system and assessees need to be on their toes to regularly monitor updates on the new GST.”
— Dr Saurabh Agarwal
Since the date of GST roll-out became non negotiable, the industry as well as GST practitioners had to accept that “there cannot be a choice except to try your luck and attempt with GSTN systems”. He adds “of course the new regime has some teething problems with respect to the compliances as well as the transitional issues”.
Amid all this confusion, the Central Board of Excise and Customs, particularly the GST wing, played yeoman’s role, creating awareness about the new Act and rules. It continuously and tirelessly provided answers to the frequently asked questions from the taxpayers. “They also issued clarifications on many tricky policy and implementation issues which helped the taxpayers no end,” Majumder points out. Agarwal agrees a lot of clarification is sought and is received from CBEC (See box on Clarifications). The government further initiated a number of steps like GST software, GST app and excel sheets to facilitate the transition process. Many private companies are now providing software that can completely automate the GST return filing. “They are easy and once learnt can be operated by accountants in companies. Hence, we should see the initial burden on CAs being eased out in the second or the third quarter after implementation of GST,” adds Agarwal.
“Yes, certainly the refining process is an approach which aims to improve and smoothen the implementation of the new tax regime. For the economy to be able to reflect the efficiency and also the industry participants to reap the benefits of GST, it would take time. Hopefully the refining process would limit to modifications...”
— Suresh Rohira
Under the circumstances, that GST implementation was successfully rolled out by the Ministry of Finance despite these huge challenges is commendable. Agarwal also blames “the inherent resistance to change” as a primary reason for the initial hiccups but feels, “the industry is excited to see a unified tax regime devoid of corruption.”
Majumder’s only regret: “We have been waiting for GST for the past 11 years. It’s a great reform, not only a tax reform. It would touch so many sectors of the economy. GST definitely deserves a better welcome with respect to preparedness of GSTN and the taxpayers.” However, he adds, that the government may have had compulsions to launch GST on July 1.
So, what lessons are there to be learnt from the initial phase of GST implementation in the country?
The experts seem to be unanimous that at least some of the hardships could have been avoided with better planning. “The government could have got the IT platform completely ready instead of experimenting it on the industry, which caused grievances, and the announcement on the date of extensions for filing returns could have been planned better instead of the last minute ordeal. Timely announcements could have changed the perception and an “active” on-call helpline to overcome such issues would have been realistic,” observes Rohira.
• The government exempts goods imported by units or developers of special economic zones (SEZs) from integrated goods and services tax (IGST).
Ideally, the GST Act should have been made available in the public domain at least two years in advance, says Agarwal. As regards the lessons learnt from the first 50 days of GST roll-out, he says, “The online system needs simplification and possibility of rectification in returns”. He also advises that human interference where entries have been wrongly put should be permitted. Additionally, simplification or a single heading for reverse charge on purchases from an unregistered person is desirable as the current system is complex.
According to Rohira, the primary issues faced by the industry are the transitional procedures because integration of the different tax laws in one bracket is a huge challenge for the government as well. “Lack of clarity on provisions is another challenge being faced and worked upon on a daily basis with limited success,” he adds. Further, although the fundamentals of taxation are still the same, there are some points which the lawmakers have been unable to see from an execution standpoint causing confusion.
Rohira also finds lack of preparedness of the IT infrastructure as a major problem, as the GST system is the aggregate of seamless documentation, recording of debits, and dispersal of credits on an IT platform, which needs time to settle. The GSTN portal is not completely ready to cater or receive information and, accordingly, the extensions are unplanned. The medium for compliances through specific GSP/ASP also requires time to overcome such issues for a smooth implementation of GST.
GDP has been in a free fall and there are concerns that the complications around GST impacted growth. Is GST responsible for the economy’s poor show?
India’s economic growth slipped to a three-year low of 5.7 per cent in April-June, underscoring the disruptions around GST. “The slump in GDP growth rate in Q1 is quite a proof of the country being unprepared for the new tax regime coupled with economic struggle to recover from the shock of demonetisation,” observes Rohira. Though it cannot be said that the country was completely unprepared, but with respect to the unresolved doubts and technical difficulties on transitional issues and filing returns, “the first 50 days have been a bit of a real challenge for many”, he adds.
The recent quarterly results season has ended with lacklustre numbers. The aggregate net profit of 2,418 companies fell 8.63 per cent in the first quarter of 2017-18 as compared to the same period last year. Experts attribute this to destocking done prior to GST implementation. But are there reasons other than destocking that affected the results? And will GST adversely impact the results of the second quarter?
“The whole industry is undergoing a metamorphosis. Many reforms like the demonetisation and shift to cashless India could be possible factors for the downtrend,” Agarwal explains. The focus of the government too has shifted from industrial sector to agricultural and rural sector and “this could be another factor,” according to Agarwal.
“There is certainly a visible fall as compared to the previous financial year in the aggregate net profit and as predicted by various experts destocking prior to the implementation of the Act is considered as one of the primary reason,” observes Rohira.
Exploring this line of thinking further, he adds, “There has also been a fall in exports by 11 per cent and that could probably be due to increase in the working capital requirement.” In the new GST regime, exporters can no longer enjoy the exemptions, except for the basic customs duty, and would now have to pay IGST and subsequently claim refund. “This would impact their cash-flow and blockage of funds. Moreover, smaller exporters are now re-thinking due to additional borrowings, which may increase their price by 1-2 per cent,” Rohira explains.
However, according to a recent SBI report, the negative impact of GST on growth has been “majorly emphasised” and the free fall in GDP numbers is more structural than transient. The report also states that a significant destocking in both consumer and investment intensive sectors was already taking place in 2016-17.
Agarwal calls it the “time of disruptive innovations” and says that startups like Reliance Jio have set the expectation that the entire industry needs to follow – the principle of either “shape up or ship out”. The other reasons for the downslide could be the global shift with many countries like the USA and the EU nations focussing on creating more employment in their own countries and, thus, adversely affecting the export of services from India to these countries. “There is also the issue of debt that could be aggarvting the economy,” adds Agarwal. Additionally, the economic poor performance could be attributed to the fact that a large number of companies have taken huge debt and are now unable to service it due to slowdown of the economy. The recent proceedings under the Insolvency and Bankruptcy Code too have made companies cautious and they are undertaking actions which are less risky and conservative. Another reason could be “the dynamic policy making followed by the Government of India that has made many industrialists follow the wait and watch policy,” reasons Agarwal.
Successful days ahead or is there more stress and strain in store for the industry?
Rohira predicts the lingering impact of the GST disruption will continue for some more time and hopefully will not go to the extent of “adversely affecting the results of the second quarter”. On the other hand, Agarwal is confident that we would see progress once things become stable.
“This will depend on two factors – successful operation of GSTN in a sustainable way and early course correction taken by the GST Council with respect to certain critical deficiencies in the structure and policy for GST,” opines Majumder. The first one is self explanatory. Majumder explains the latter.
The critical deficiencies are as follows:
• First, we should have taken care of small businesses in a better way. SMEs provide maximum employment and there is a need to support them. The failure of small businesses will impact the big ones. For example, if a small factory into the business of electroplating dials of expensive wristwatches were to shut down, the wristwatch manufacturer who does not have electroplating facility will be hit. It takes time to develop in-house capability and may also result in cost inefficiencies.
• Second is the threshold for GST exemption, which at `20 lakh is very low compared to the international standard. Even Malaysia has threshold exemption for currency equivalent to `86 lakh. A small business owner is set to lose even this threshold if he does interstate supply. For example, a small industry in Mayapuri enjoys `20 lakh threshold exemption if he supplies to a big manufacturer in Okhla (both in Delhi state). But if he supplies to Gurgaon in Haryana or Noida in Uttar Pradesh, he will have no benefit of threshold exemption and he will have to pay GST and fulfill all the compliance requirements. Most likely, he will want to remain out of GST and will confine his business to Delhi, and his business will shrink considerably.
• Third is Reverse Charge mechanism. A small business may be outside GST by virtue of threshold, but in most such cases the recipient big business will have to pay GST and take credit after a certain period. His working capital will remain blocked for a certain period. Further, he will also have to undertake all compliance requirements, involving a cost, on behalf of his supplier, the small business. In most such cases, the big business will switch over to a supplier who is paying GST to avoid the extra cost. Small business would shrink further or start paying GST despite the threshold exemption to retain business.
• Fourth is the e-way bill for movement of goods in the country. “Introduction of this scheme will surely bring back the flavour of inspector raj,” fears Majumder. The loaded trucks will be stopped for checking compliance (e-way bill). Now that all the states would have the same rate of State GST, there is no reason for introducing this system of checks in highways. It will give rise to delay in transportation and increase the transportation and logistics cost. The safeguards suggested in e-way rules, will not be sufficient to prevent misuse of power and attendant compliance costs – both visible and invisible, he warns.
• Fifth shortcoming is around the payment of compensation cess for both imported and exported goods, because these would be covered by the IGST Act.
• Last but not the least shortcoming is the denial of exports against ‘Letter of Undertaking’ for the small exporters where the foreign exchange earned is less than `10 crore. Such an exporter will have to pay IGST on inputs and then claim refund.
Despite these obvious shortcomings, Majumder does not agree that GST has compounded the problems of the economy or that government should have deferred GST roll-out because of demonetisation. “Demonetisation was also to achieve certain things which GST would have done,” he explains. For example, demonetisation was to bring the people in the informal sector over to the formal sector by making them pay through banks and not in cash. One of the objectives of GST is also that. The only reason for which GST should have been deferred as was also being demanded by certain sections of trade and industry, is “the absence of a fully prepared GSTN,’ he clarifies.
CLARIFICATIONS UNDER GST
• Clarity on what is a registered brand name: Unless the brand name or trade name is actually on the Register of Trade Marks and is in force under the Trade Marks Act, 1999, the CGST rate of 5% will not be applicable on the supply of such goods.
“Change is something which one may try to avoid as long as possible,” Rohira says on a philosophical note. The entire industry is facing the dilemma of comparing the issues being faced with the expected benefits in the future. “The compliance requirements to be fulfilled by the individual professionals and also other participants are something which will take time getting used to. But to reap the benefits of the structure of GST it is vital to fulfil such requirements to maintain seamless flow of credit,” he adds.
And the roadmap…
The benefits flowing from GST make Agarwal “highly optimistic” of its success in India. “There is a strong political will accompanied by a desire among businessmen for corruption-free tax compliant India.” With GST, we get into the group of 160 countries that have already implemented Goods and Services Act or similar Value Added Tax. It has been a success in countries like Malaysia, Australia, Canada, Singapore, etc., and hence it might be a success in India as well. The GST roadmap has become a little clearer now as taxes have been reviewed and new features introduced to modify GST. The timeline for furnishing final tax returns under the GST regime has been notified. The tax rate for a number of segments has been amended. Further, under GST, India is likely to become a more attractive destination for investment with one tax and one nation.
“The GST scorecard will be out shortly. Though it is too early to be able to predict overall success or a failure of GST, but whether GST is actually the tax which unifies India under one tax head will be evidenced in the coming days,” Rohira says. For the future to be a smooth sailing it is crucial that the issues which came up during the first quarter are dealt with upfront and also the expected discrepancies are taken note of with no harsher ramifications by the department. “Though the overall numbers are expected to remain weak for around a year, sectoral performance, just like the first quarter, will vary in the coming quarters as well,” cautions Rohira.
Majumder sees GST giving a boost to manufacturing, logistics, agro-based industries and hence agriculture. He also predicts equitable growth of industry across the country particularly in non-industrialised states which will now be rich in revenue because of GST being a destination based tax. It will help them in developing infrastructure, road network and power, which in turn will lead to more industries, more employment and consequently more growth in GDP. For these changes to happen, “GST in India will have to be treated as work in progress,” he adds.
At the end of the day “GST is a much-needed tax reform” as says Rohira. A lot will, however, depend on its implementation going forward. If done correctly with clarity on the foreseen issues, it can do wonders for the Indian economy. It will eliminate double taxation and lower the product prices indeed, assimilate the informal sector into the greater Indian economy and provide a much needed boost for India’s flagging export market. But the implementation issues could be problematic for India’s small businesses and, perhaps “more importantly, undermine public trust in GST”, says Rohira. The steps taken by the Council will decide the final result of the new tax regime which everyone is eagerly looking out for.
CAUTION: ROADBLOCKS AHEAD…
(Based on interviews & secondary research)