Fixing GST

As the Goods and Services Tax turned one, Business Today organised a discussion to understand how the journey had been so far, and what needed to be done in future. The panel, comprising Anita Rastogi, partner, indirect tax, PwC; Abhishek A. Rastogi, partner, Khaitan & Co; Atul Gupta, senior director, Deloitte, Haskins & Sells LLP; Ajay Sahai, Director General & CEO, Federation of Indian Export Organisations; Harpreet Singh, partner, indirect tax, KPMG; and Anil Bhardwaj, secretary general, Federation of Indian Micro & Small and Medium Enterprises held a 90-minute discussion

Prosenjit: How has the GST experience been so far? Let us start with you Anita..

Anita Rastogi: I would say that it was a great initiative by the government to bring in GST last year and I must congratulate not only tax officers and the government but also people at large, taxpayers, because all of them came together to make it succeed. We are aware that a change of such magnitude will bring in glitches and were ready for it. But technology let us down. We did not expect it to be so bad.

While the GST rollout was overall good, it was a little bumpy for various sectors and people. Overall, from an economy perspective, it's done decently well.

Yes, there will always be challenges. Consumers and industry had to grapple with multiple rates. There have been issues of classification and some disputes on tax rate on some products. But the government is committed to rate rationalisation; I hope it happens soon.

We never expected GST to bring so much litigation so soon. There are writs being filed left, right and centre. There have been advance rulings and it is a sad scenario with two different states giving different views on the same issue. But the union government is also looking at this area.

I have a suggestion on advance ruling. At the first stage itself, when multiple applications are being filed across the country in different states and it is all being done digitally, somebody could take charge at the central level and decide on which issues the advance ruling authorities have to give a ruling. And ensure that if there are 7 or 10 companies which have gone for the same issue on a similar fact, we do not have to deal with divergent advance rulings.

Overall I think a lot of things went right, but we need to move ahead. We are waiting for the petroleum sector to be brought under GST - I think that is one big wish of industry and the common man. Overall I would say it's a balanced score card but a lot of refining needs to be done.

Harpreet Singh: I think Anita has covered most points. I would like to add two. One of the biggest benefits of GST is optimisation of the supply chain. Transporters and logistics companies say the turnaround time of a truck has reduced 20 per cent - that is no mean achievement. The second big point is how responsive the government has been. In my experience, I have never seen government lending its ears so often and moving so swiftly to correct things.

Atul Gupta Senior Director, Deloitte, Haskins & Sells LLP

Talking of advance rulings, there was one from Karnataka and we were contemplating approaching the government to rectify it. While we were still internally discussing this, there was a circular issued by the government in a way nullifying the advance ruling and setting the right position.

Abhishek Rastogi: The GST Council has been pragmatic and things are moving and improving.

Coming to writ petitions, we have filed about 30 writs and the experience has been different in different cases. These are writ petitions on different issues, diverse sectors. The GST Council has played fundamentally a fantastic role, I would say, because I think 40 per cent of the writs have become redundant with the government moving to correct things. But there are challenges. For a particular case of advanced authorisation where we went to the court, we were granted an interim relief by the Delhi High Court. But within seven days, the government came up with a notification to give the benefit to all the importers and it looked like initially from the provisions that the benefit flows to everybody. But there was a hidden condition of pre-import, and once that was realised a couple of months later, Calcutta Commiserate issued some 729 notices to different importers throughout the country - not only in its jurisdiction. And yes, the second round of litigation started.

I have mixed feelings. There were several issues which went to court. You see this reverse charge for unregistered procurements. That notification was just a couple of days after we filed the writ in the Delhi High Court. It was expected that there will be some change; it was mentioned in the Court not only for this but also for the IGST implications in the provisions outside of India. So I think the GST Council issued a notification of extension. And sometimes, things keep getting extended. The government has to take the call. They've done a fantastic job but whether this provision has to be extended forever like this by three months at a time or we need to take a call to suspend it for the time being....

I think the last point would be on advance ruling. We have a case in the Supreme Court (SC) on crypto currencies. The SC follows a very simple formula. If there are five petitions on crypto currency in different high courts, the SC passed the order that these five high courts may not pass different orders and ordered for a transfer of these petitions.

So, we're in the same situation for advance rulings. If different matters in different jurisdictions are being filed, the simple thing would be to consolidate all of them.

Anita: I completely agree. And on the reverse charge issue of unregistered suppliers, I have another point. As Abhishek was saying, somebody has to take a decision. If the government keeps on postponing a thing, that's not good because industry needs certainty, especially unregistered firms supplying goods to registered firms. I understand the larger objective but as we are in a situation where we're grappling with so many other issues, the best thing for the government is to say that it is suspended for at least two to three years.

Abhishek: From the common man's perspective it doesn't make sense. It is completely unheard of globally, where you are forcing registered dealers not to deal with unregistered people, which never was the intent from the point of the economy or from the point of the GST.

Prosenjit: Atul, are these issues cropping up because the GST Council didn't think of it or because of bad drafting of rules?

Atul Gupta: It's important to realise the context in which we got GST. The constitution per se was never made ready for a GST kind of tax and that's why the constitutional amendment was needed. It had to be an imperfect GST. We're complaining of multiple rates when even in the EU you don't have a single rate. Most EU countries have three-four rates.

Harpreet Singh Partner, Indirect Tax, KMPG

We've just done one year for something as transformational as this and we need to give the government some time to meet the conflicting interests of big industry, small industry and the government itself. Are we even aware of the revenues the government is getting? Where will it pay the 14 per cent additional revenue promised to states?

The government has been extremely responsive in terms of course correction. The glitches were there in the GST system and the IT system but the government needed to start it before states started disagreeing with each other. But mind you, they brought in GSTR-1 and GSTR-3B, did away with input credit matching, did away with the so-called procurement from unregistered dealers -they said okay, we'll defer that because it is creating issues.

Prosenjit: You mean the GST Council?

Atul: Absolutely. It's amazing that you get so many people to agree - and everything till date has been on consensus. The easy part is over. The more difficult part, the level three details we're talking about as consultants and as domain experts, those will take time. I think what's important is to address two major objectives. Has the tax base increased, is there tax buoyancy? Is there, from a consumer's standpoint, major inflation which GST has caused? And I also feel a little bad that we did not have a much better mechanism to address exporters refund issues.

On the procedure side I don't think there are too many issues in terms of filing returns in the given formats.

Prosenjit: Or is it too early?

Atul: Nobody doubts that input credit matching is a must, particularly when we're talking about unregistered procurements that are not to be taxed. You can't have a system which doesn't result in stopping rampant evasion that this country has seen otherwise. So, I think that's very important.

Prosenjit: Dr Sahai, you represent exporters. What is your view?

Ajay Sahai: GST roll-out has not been ideal but due credit to the government that they've been able to sort out most problems. When we talk to exporters, mainly small and medium ones, they say that since they're getting input tax credit for most items, the supply chain has integrated, logistics cost has come down. Slowly they're seeing manufacturing competitiveness increase, which translates into exports also.

Dr. Ajay Sahai Director General & CEO, FIEO

Yet, we have challenges on refunds. Let me flag a vital issue. Howsoever efficient a refund mechanism, it entails blocking of capital as first you pay tax to the input, bring it to the factory, convert into a finished product, export and then the refund process starts. That's why, be it EU, Australia or Canada where a GST or VAT system is in place, they have worked out an exemption rate. Is our interest rate lower than those countries or are our exporters better equipped that we don't have something like this?

Prosenjit: Anil, MSMEs were most hard hit initially. Are problems getting sorted out?

Anil Bhardwaj: MSME is a heterogeneous sector. Some medium and small firms that accounted for 10-15 per cent of MSMEs have been part of the VAT regime. For them the transition was not that painful. Then, there are micro enterprises which have not been part of the formal sector. In the pre-GST era, up to a turnover of `1.5 crore, manufacturing enterprises were not required to charge and deposit tax. But because of this, whatever taxes you paid on inputs become part of your cost. The government gave this option keeping in view that even if they're earning 3-4 per cent value addition or even 10 per cent of value addition, they were only holding back the tax of that value-added part, because on raw material purchases, they had already paid taxes. Now, that has changed and became a problem - it might result in rising NPAs among MSMEs.

Anita Rastogi Partner, Indirect Tax, PwC

In GST, the moment you raise the invoice and supply goods, you pay tax on the 20th of every month. Now, payments come three months down the line - in India if you're supplying to government or large companies, 90 days is the rule. So, that means for that period you have paid for your buyer and tax is 18 per cent. Earlier tax was less. Now the tax has increased and you have to pay right now, resulting in struggle for working capital. Earlier, most of these problems were related to states because in the states you had to pay after raising invoices. But one issue was that you had to correct your accounts at the time of filing of your final return. So far as penalties were concerned it was the same person you were dealing with. So you could explain or strike a deal. It was the discretion of the officer who would allow or disallow payment. Now it is very different. If you've not paid in time, you will not be able to file returns for the second month and you are stuck. A default at one level cascades into default of the entire period.

Enterprises also have to deal with a 2014/15 policy of the RBI called the SMA - Special Mention Account - mechanism. It directs banks that if there is a delinquency in payment of principal or interest for even 30 days the account needs to be placed under watch. After 60 days, lending has to stop, and after 90 days, you have to stop everything. So this guy has done nothing wrong - he has only supplied to a big guy and not got payment. Under a new taxation regime, his account is empty. So, this NPA classification coupled with this new regime is adding to the problem.

Abhishek: Working capital is relevant to area-based exempted zones. Many zones have problems: one is the quantum of refund. Second is the eligibility per se. The notification which came in 2017 says the commencement certificate should have started on July 1. So what happens to a unit which did everything two years prior to GST but could not commence business before that date?

Abhishek A. Rastogi Partner, Khaitan & Co

Ajay Sahai: The latest RBI data says export credit in April 2018 is 40 per cent. That is the flow of credit for the bank sector. Exports is not a level-playing field. Indian manufacturers compete with SE Asian countries where capital cost is 2-3 per cent. Here he borrows at 12 per cent. It erodes his competitiveness, and in many sectors, business is done at 2-3 per cent margin. Now if you're eating up 2-3 per cent in taxes or interest rate, you're not competitive globally.

Bhardwaj: The moment you cease to be competitive to imports, you will be replaced. It is for this reason that manufacturing in the MSME sector is shrinking.

Anita: Textile exports have been massively hit. All garment exporters in South India who supply finished textiles to branded companies overseas have been hit. In restaurants, when GST came in, consumers thought that the very next day, the bill would be much less. But there was marginal change. The government had the apprehension that input tax credit was not being passed on to consumers. So, on November 15, it announced restaurants were not going to get any credit and tax would be 5 per cent. The fundamental point is that the numbers have to be seen properly. What we're noticing is that many restaurant chains have stopped expansion, many are closing operations. They say that under the old regime, 'I was paying VAT and service tax. I was able to get the credit for both.' When GST came, there was no huge additional credit.

Anil Bhardwaj Secretary General, Federation of Indian Micro & Small and Medium Enterprises

Harpreet: Think of medical services, which have been exempted from GST, which means they don't have any output tax liability. But on all purchases they are paying GST and for some products GST has slightly gone up. For them the working capital damage is permanent.

Atul: I have a different point of view. GST is not a panacea for all ills and pains of every industry and we always knew that when CST went there would be some issues. Nowhere in the world are things different in the health industry. We want a single rate but we also want a different dispensation for restaurants, a different one for health. What kind of a convergence are we then talking about? From a conceptual perspective, we want the perfect GST in the world which no other country has. So the point I'm making is, I think yes, any major ills of any industry need to be sorted out but a 2 per cent impact or a 3 per cent-plus impact - the government cannot be resolving this.

Sahai: For exports only partly. Because the ITC-based software has not been modified so far. Secondly, we have not moved to a completely online platform for the ITC return.

Prosenjit: Has the government achieved its goals?

Atul: When do we get to know how the targets were set because that's where some transparency is required? What was the total government revenue in 2015/16 and 2016/17, ex-alcohol, ex-petroleum products, all the excluded sectors? What are they getting out of VAT + Excise + and the so-called countervailing duty? Those numbers are not in public domain. Having promised states a 14 per cent year-on-year gain, we need to understand if the government is gaining or not? At Rs 95,000 crore that we are getting today - is that enough from the fiscal deficit standpoint?

Abhishek: You don't have to see just revenue collection from GST. Direct tax collections have gone up significantly.

Atul: The government is talking about indirect tax gains of GST, the so-called logistics cost you talked about, the direct tax compliance increasing by itself..

Anita: We believe there will be more revenue buoyancy as we move along because more people are going to come into the GST regime. Second, many them have still not been able to figure out how to file returns and will do eventually. Third is the government has announced it will look at credits because of fake invoices. But there are states which doubt if after five years they will not be able to get the revenues they would have got pre-GST. Punjab is one.

Abhishek: There is a large amount which needs to be settled between states and government. June 30 is the date when they would close one year and every settlement has to happen so I think `1,80,000 crore has been kept for that. That may be critical when we talk about North East States, Punjab and other consumption states.

Atul: One objective was to address regional imbalances between consumption and production states. I think that is getting corrected.

Harpreet: Also, 14 per cent was not the growth of each and every state. Only 9 to 11 states do more than 14 per cent. The average was 10-11 per cent. The government, to implement GST, promised 14 per cent to all states.

Anita: A lot of data analytics is going to take place now - GSTR-1, e-way bills, etc. This will help catch tax evasion. Also, data coming out shows that even manufacturing states are gaining as much as consumption states.

Rajeev: When do you expect rate rationalisation?

Anita: Many goods are still at 28 per cent. The GST Council would look at some like steel and cement which pay 28 per cent but are not luxury goods. I expect they will be lowered to 18 per cent. Also, they might merge two rates.

Atul: I don't see rates converging until there is an increase in overall tax rates and revenue.

Rajeev: Two other points. Is the use of cess they should do something about? Second, is there buoyancy? This average Rs 89,000 crore collection has actually become `94,000 now or is it just a myth?

Harpreet: For cess they are considering three alternatives. One is a surcharge on customs duty and income tax; that would be a nightmare. Second is an agricultural cess on many products. Third is just a sugar cess. That is a retrograde step. The government is seriously worried about fake invoices and revenue leakage.

Atul: In the EU, which has VAT for several years, the total loss on account of fake invoices around input credits is 30 Billion Euros. To say India will perfect this system overnight is asking for too much.

Prosenjit: GST was supposed to cut out human intervention. Has that happened?

Anita: Human intervention has not gone away. Even in transitional credit, which nobody was required to look at -- you had to fill up a form, upload it - there has already been an audit that took place where officers came and sat in the office of clients.

Harpreet: They have policy documents which say that in the GST we will follow the PPC approach. P stands for Paperless; the second P stands for Presence-less; C stands for Cashless. But then the fact is that the law has changed, but people have not changed.