Any good movie cannot become interesting without the presence of a villain and ultimately , the villain should get defeated. Goods and Services Tax has a same story with some structural flaws still playing a role of villain amidst our incessant attempts to ensure that those flaws are removed.But before we attempt to remove the flaws, we must understand them in a critical and holistic manner.Let us understand how GST, which is a great step forward , is getting embroiled in the flavor of Gabbar Singh.
The first major consequence of GST is high compliance cost.The compliance cost with minimum two returns per month and annual return is taking a toll on small businesses.Further, the returns are technology based and need a deep knowledge of operating the GST portal and understanding the nuances of GST. It means the market of Accountants is booming while those who are doing business are seeing their bottom line getting pruned because of GST. It is high time that government comes out with some ‘Assistance program’ so that small businesses can get reasonable assistance on GST without paying arbitrary and hefty amounts to consultants. ICAI may be roped in order to formulate a policy for small businesses.
The second major troubling factor of GST is ‘information asymmetry’ around the concept of ‘Input Tax Credit'(ITC) . GST is based on the concept of value addition at various levels of the supply chain. The Input tax credit is the backbone of this value added chain. GST is a destination based tax and therefore, the end-Consumer should pay only on value addition at various stages of supply chain.This is made possible when the stages before the consumer like traders, retailers ,processors and manufacturers pass on Input tax credit to consumer by reducing it in final price.However, consumer in India is hardly aware of ‘Input Tax Credit’. As a result, he is paying GST rate without asking for reduction in prices of item compared to pre-gst regime whereas the shopkeeper may be getting ITC for that.It is therefore, vital to spread awareness about ITC among the masses so that benefit of ITC goes to the end consumer.
The third major factor is blocking of certain credits by government for use by the businesses.Let us understand that not all the taxes paid on raw material consumed by an organisation are paid back as credit. In fact, government has blocked credits depending the purpose of use of raw material.For example, railways does not get any ITC when it spends money on its hospitals or other staff welfare activities.While it makes sense to block credits for certain activities which are non-business but the troubling point is that government has blocked credit even on supply of goods as railways is a service based organisation.However, it must be noted that those goods are also essential to provide service to passengers.The result is railways gets less than 12 percent ITC (eg 60 crores ITC out of 563 crores paid) on the total tax paid on the input side.
While railways being a government organisation and with no implications of income tax ,will always comply with GST but imagine a small businessman who has no incentive to show the income if he does not get any ITC on input side.For example, if a food business is getting 12 lacs as Input Tax Credit on tax paid of 1 crore on input side and sales of 10 crores.He will not mind showing 5 crores of sale , foregoing 6 lacs of ITC but gaining big time on under-reporting his income tax liability.It is therefore, essential that ITC should be eligible for as many items possible which are directly related to functioning of business rather than simply classifying them according to service or goods based nature of the organisation. ITC makes the chain, sustains the chain and hence,its role is crucial in success of the GST. Making ITC redundant could bring back the cash economy in the market.
Thus, it is high time we address these issues in a focused and holistic manner so that GST gets popular as a ‘Great System of Taxes’ and not the other way around.