GST 2.0: Is this the right time? And what kind of reform do we need?

Turbulent years of implementation goods and services tax (GST) in India seems to have ended. This transaction-based and indirect tax, which was rolled out nationwide in July 2017, has been resolved. Most of the new problems that arise, such as problems with ‘bill matching’ and delayed tax refunds, which have lasted for many years, have largely been resolved. The controversial issue of states not receiving their constitutionally mandated compensation during the height of Covid has also been resolved.

At the GST Council meeting last month, the Government of India said it would soon clear the pending balances for the states — Rs 16,982 crore for June 2022, the final tranche — although the compensation fund has already cleared. drum. GST collections are back on track. Revenue was up last month — Rs 1,49,577 crore — up 12% y/y. For the period from April to February of the current financial year, monthly GST . collection did not slip below Rs 1.4 lakh even once, a significant threshold considering that it fell to a low of Rs 32,172 during the month of lockdown in April 2020 before rallying back to Rs 10,000 in October, after six months.


With the GST collection going strong — the result of expanding the tax base and sealing leaks — it’s the right time to usher in the next phase of India’s most ambitious tax reform. Degree. So what kind of reform should be part of GST 2.0?

Pratik Jain, tax partner at Price Waterhouse & Co, said “rationalizing the rate (reducing the current four tariffs of 5%, 12%, 18% and 28% to just three) and bringing the products to oil and gas into the scope of the GST rate structure” should be prioritized to take reform to the next level. For petroleum products, he said, if consensus on passenger fuels is going to take longer, the GST Council should start by including aviation turbine fuel (ATF) and natural gas. course. Now, petroleum products and some commodities such as electricity and alcohol are outside the scope of GST.


According to Jain, two areas need the Council’s immediate attention — the establishment of a GST appeals court and closer coordination between central and state GST agencies for audits. The Council, chaired by the Union Finance Minister along with her counterparts from the states as other members, is the highest decision-making body on indirect taxes in India. For its part, the Council has begun to discuss new reform measures. Its 49th meeting held in New Delhi last month discussed the issue of establishing an appeals court. It adopted the report of a group of ministers with some amendments. “The final draft amendment to the GST law will be sent to Members for comment. The Chairman has been authorized to accomplish the same thing,” the official statement was released after the meeting.


According to Saurabh Agarwal, tax partner of EY India, the GST appeals court may be based in Delhi with regional benches in Mumbai, Kolkata, Chennai, Bengaluru, Ahmedabad, Prayagraj, Chandigarh and Hyderabad, as “maybe cannot be established in all states in the initial phase.

According to a recent Press Trust of India report quoting an unnamed official, a four-member appeals court with two technical members (one each from the Center and the states) and two members Judiciary is proposed to be established in each state. The establishment of an appellate court will reduce litigation in court and reduce court costs for litigants.


“From a short to medium term point of view, the next phase of GST . reform Vikas Vasal, managing partner country-tax, Grant Thornton Bharat said.

“The focus should be on the establishment of appellate courts, the introduction of anonymous assessments similar to those in the income tax regime, and an amnesty scheme to resolve existing disputes many of which arise.” caused by minor interpretation or non-compliance issues in the early stages. year GST,” he said, adding that from a long-term perspective, the focus should be on expanding the scope of GST and bringing all goods and services into its scope.


However, Sushil Modi, the former deputy chief minister of Bihar state and the politician who headed the GST committee empowered before the implementation of the tax regime, argued that the GST does not need any more major reforms. “What it takes is a little tweaking. With good revenue growth and inflation under control, this is the right time to reduce the amount GST . plate To three. There should be one plate between 12% and 18%, and another plate between 5% and 12%,” he said, adding that the highest plate (28%) should be left as is.

An EY report published last year, “Transforming GST: The Way Ahead,” recommends rationalizing rates according to the following formula: “Move to a three-tiered rate structure of eight (proportional proportions). worth), 15 (standard rate), 30 (rate minus scale) percent by merging 12 percent and 18 percent into 15 percent sheet and increasing the reduction from the current 28 percent to 30 percent. The report also said that the 30% level could be raised to 40% after the deregulation of compensation.


The GST, which includes 17 major taxes and 13 taxes, has four tables plus a list of exemptions (eggs, curds, vegetables, etc., no tax). Luxury and sinful items attract a maximum tax rate of 28%. An additional tax is imposed on items such as tobacco, carbonated drinks, caffeinated beverages and certain motor vehicles, above and above the 28% tax rate, to finance the volume compensation needed to assist states that do not collect GST at an annual growth rate of 14% or more. The compensation is only for the transition period from July 2017 to June 2022.

Although states no longer receive compensation, overtaxing continues and will continue until March 2026. Overcollection has been extended to meet the revenue gap. due to the pandemic, when the Center had to take out a loan (Rs 1.1 lakh in 2020-21 and Rs 1.59 lakh in 2021-22). Regulations vary from item to item — for example, pan masala attracts a 60% regulation and tobacco pan masala has a whopping 204% regulation.

According to RBI’s report on state finances released in January, the top 10 GST recipients during the 5-year transition period are Maharashtra, Karnataka, Gujarat, Tamil Nadu, Punjab, Uttar Pradesh, Delhi, Kerala, West Bengal and Madhya Pradesh. The report states that the states and territories of the Union most likely to be affected following the withdrawal of compensation are Puducherry, Punjab, Delhi, Himachal Pradesh, Goa and Uttarakhand which, in that order, is the share of the compensation. usually GST in their tax revenue averages 10% or more.


However, after analyzing the sales figures for the 10-month period from April to January of fiscal years 22 and 23, Jain concluded otherwise, “Uttarakhand, Himachal Pradesh, Karnataka and Gujarat have been able to sustain growth rate of more than 14% despite discontinuation of service. GST compensation. States such as Delhi, Uttar Pradesh and West Bengal appear to be worst affected by the suspension of compensation.”

It was the concept of compensation that was introduced into the GST regime to attract the recalcitrant, creating states like Maharashtra and Gujarat. Some of these producing states used to enjoy higher revenues due to the origination tax regime that was introduced before GST. When the compensation runs out, how will the states adapt to the new regime and reform themselves to reap abundant revenue? After all, it was clear from Day One that GST compensation was only a temporary measure.

“Ultimately, countries must become self-sustainable. To increase revenue, states should try to fix tax leaks and monitor compliance more closely, Jain said.


India’s chief economist and former chief statistician Pronab Sen added that the loss suffered by states as a result of GST withdrawal is something the “Finance Commission needs to look at”. A new set of reforms needs to be initiated to make GST simple and seamless.

However, Deloitte India’s tax partner, MS Mani, argues that it is essential to stabilize GST with minimal changes during the year as each change necessitates modification of IT systems, product prices, accounting business plan, etc. “It would be better if all the changes discussed and approved in the financial year were applied from April 1 of the next financial year to give the business time to prepare and get ready. for the same thing,” he said.

It is possible that a series of changes can be combined and introduced at the same time. GST 2.0 is indispensable but it must be deployed with minimal disruption.


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