On July 01st 2018 the Goods and Services Tax (GST) completed 1 full year of implementation. A total of 28 meetings of the GST Council meetings were held till date and a plethora of changes have been made to the GST Act. There are modifications with respect to rates (in fact a little too often), modifications with respect to processes, procedures and the technology platform. But overall, even the die-hard sceptic would admit that the government has managed the transition from a plethora of taxes to GST quite effectively. Revenue collections have already stabilized at over Rs.95,000 crore on a monthly basis and is expected to scale beyond Rs.100,000 crore on a regular basis.
However, the completion of 1 year is also the time to look back at the highs and lows of GST implementation. It must be said that, barring certain sections of business, there has definitely been a vast improvement in the efficiency and efficacy of GST collections and administration.
10 points to note in 1 year of GST implementation
- GST has surely got rid of the cascading effect of indirect taxation in the earlier regime. What exactly is this cascading effect? When you manufacture goods in a factory, there is an element of excise or sales tax that you have already paid on the input too. In the old regime, there was no credit available for such expenses. That almost amounted to double counting and creating a cascading effect on costs. Under the GST, there is automatic input tax credit (ITC) that can be set off against the GST payable. The entire process has become almost seamless.
- While the rise in WPI inflation may indicate a rise in the input costs, the profitability of companies indicates that businesses are surely benefiting from lower cost incidence due to seamless credit on inputs costs available. This is not only simple but also transparent.
- Rates of GST on items of essential use have been drastically cut down. For example, most food items of mass consumption have been either put in the 0% bracket or the 5% bracket. In the last meeting, the GST Council reduced the GST rate on most consumer durables like televisions, washing machines etc to 18% from 28%. Above all, the entire GST is slowly gravitating towards just 2 distinct rates of GST, which is likely to make things a lot simpler.
- The introduction of the E-Way Bill earlier this year has gone a long way in plugging leakages of GST payments at the time of transport of goods. While it has added an element of bureaucracy to the entire GST collection process, the outcome is certainly favourable from the transparency and simplicity point of view.
- The good news is that GST has not been inflationary. The experience of other countries like Australia and Malaysia was that the implementation of GST had been inflationary in the initial years and the impact was visible at least for 3 years. In the Indian context, the rise in inflation could be attributed more to oil and food inflation rather than anything to do with GST.
- The big positive sidelight of the GST implementation has been that companies are gradually redesigning their logistic processes and warehousing networks based on business needs rather than on inter-state tax rates. This gives a better business justification and is likely to unlock value in the long run. This is one of the key reasons why consumer-facing companies are seeing a lot of value unlocking in the last 1 year.
- The full benefits of GST may be only felt when the all important products like petrol and diesel are also brought under the ambit of GST. As of now that has not been down as the state cess on petrol and diesel still accounts for a very large chunk of state revenues which these states did not want to miss out on. However, there have been indications from the finance minister and the petroleum minister that the government and the states were open to the idea of bringing petrol and oil also under the ambit of GST eventually.
- Having understood the broad achievements of the GST, there are some challenges too along the way. Firstly, GST refunds are not as seamless as they were originally made out to be. While GST payments have been seamless, the refunds are far from seamless. This is more so in the case of exports because exports are free of GST. However, they are required to claim credit for the input tax paid. However, this has been inordinately delayed in the last 1 year and that has created serious working capital problems for exporter in India.
- The anti profiteering rule was introduced by the GST Council to ensure that any cuts in the rates are seamlessly passed on to the end customer. However, with the GST rules permitting advance ruling against any anti-profiteering orders, the impact of this move has been largely negated. The net result is that the full impact of the rate cuts are not being passed on to the end customers unless the industry is very competitive and the manufacturer has no choice.
- The GST had the core purpose of bringing more businesses under the ambit of taxation and put the organized sector on par with the unorganized sector. With about 9.8 million registrations in GST and the collections at the same level, it is still not clear if the expansion of the tax base has been really fruitful. For that, we may have to wait for some time.