8 minute read 29 Aug 2022
Five years of GST in India

Five years of GST : evolution and the road ahead

By Uday Pimprikar

EY India Partner and National Leader – Indirect Tax

Specializes in indirect tax and policy advisor on some of the marquee transaction operations in the country. Avid reader.

8 minute read 29 Aug 2022

In its five-year journey so far, GST has delivered well on the ‘one nation, one tax’ agenda.

In brief

  • There is huge potential for businesses, policymakers, and economists to analyze data available, thanks to the digitalization of compliance for sharper planning and investments.
  • In its next phase, GST structural reforms must focus on reducing cascading impact in the economy and reducing uncertainty for businesses.
  • Policymakers may consider reducing the intensity of punitive measures regarding non-compliance.
  • The tax reform’s impact on sectors such as healthcare, power and MSMEs should also be examined.

Policymakers, in general and perhaps more specifically in India, have to be marsupials. Just as marsupials’ short pregnancy allows them to be more mobile and survive harsh conditions as they give birth to underdeveloped babies and tend to them post birth, in the Indian policy context also, the marsupial approach ensured that the GST reform didn’t get derailed.

The baby is now five years old. It has survived the pandemic and initial bumps quite well and is hale and hearty. Hence, GST’s implementation across the country can be counted as an achievement.

The confident ingenuity demonstrated to push forth structural reforms tailor made for the Indian context, such as the construct of a concurrent levy and the GST Council has been remarkable. Recently, the supreme court observed that as the GST Council’s decisions were recommendatory, the state and the central government were not bound by these recommendations. Moreover, concerns expressed regarding the stability of the regime can be addressed.

Constitutionally, individual states have given an irrevocable commitment to participate in the GST reform. Moreover, the entire tax administration works on a common national portal — the Goods and Services Tax Network (GSTN) — making it impossible for a state to unilaterally start deviating from the general alignment on procedures, rates, etc. The GST Council construct enables the federal structure to discuss and debate and build consensus on tax matters. The structure might slow the decision-making process, but it delivers on the ‘one tax’ agenda and enables cooperative federalism. There is a growing realization to emulate the GST Council construct in other matters that require collaboration between states and the center, such as infrastructure and healthcare or even police and security.

The other success story is the changing compliance culture, which is a critical pre-requisite for further reforms. The policy level push to link input tax credit to compliances or linking eligibility to participate in future compliances to past compliance conduct is perhaps essential. In addition, the intuitive analytics available now allow faster and sharper detection of evasion. The aggressive punitive measures, as also arguably Draconian provisions, such as disallowing non-filers from issuing e-invoices or e-way bills or unilateral powers allowing attachment of assets to recover taxes, have rammed in a better compliance culture among taxpayers. By some estimates, the pre-GST non-compliance of more than 55% has reduced to less than 20%. This has led to massive formalization of the economy, resulting in record direct tax collections.

The ‘one tax’ framework and digitalization of tax processes have triggered several seminal benefits for businesses. GST triggered an uptick in logistics efficiencies. Transportation and logistics infrastructure, such as warehousing, are witnessing increased innovation and investment. Digitalization of compliances has made high-quality granular data available not only to the tax administration but also businesses, economists, policymakers, and other stakeholders. 

The potential use of data beyond pure tax administration is extremely promising. Businesses are using it to automate accounts payable and accounts receivable processes. The government and businesses can use analytics for planning and investments. Therefore, it is important that the framework required to use this data is allowed to be put in place.

Everybody realizes that GST’s implementation is an ongoing journey. The focus during the last couple of years was to reduce abuse and evasion with a view to attain revenue stability. This objective appears to have been by and large successfully implemented. The next phase should be to embark on structural reforms, primarily focusing on reducing cascading impact in the economy and making India an attractive place of investments. The focus needs to be simplification and rationalization of legislation. Businesses need certainty and a conducive environment to work, take risks and grow. There is a need to take a re-look at the malignant punitive measures that threaten the continuity of businesses.

The present prowess attained on account of digitization allows significant leeway to make the measures related to input tax credits, export rebates and some of the punitive steps more lenient without fearing abuse. There is also merit in considering measures, such as decriminalization of the legislation, reducing the limitation period of no fraud, etc., to reduce the risks and uncertainty that bona fide taxpayers face. 

This article shares insights on the impact of GST on healthcare, Power and MSME sectors:

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GST in health services
(Chapter breaker)
1

Chapter 1

Plugging input tax credit leakage in pharma and healthcare

As GST reforms in India progress, the pharma and healthcare sectors continue to be challenged by the leakage of input tax credit.

Business promotion strategies in the sector include distributing brand reminders in the form of pens and writing pads to doctors and distributors. Some companies organize medical camps to provide free medical facilities, including medication and vouchers for free treatment, at third-party clinics. The Central Goods and Services Tax Act, 2017[1] (CGST Act) restricts input tax credit on free distribution, gifts, things of personal usage, etc., and the resultant block in the input tax credit chain is adversely impacting the sector.

Similarly, input tax credit is restricted to goods lost or destroyed. As research or testing and expiry of goods is a common practice in the pharma industry, disposal of goods is part of regular business operations. Construing such events as ‘loss or destruction’ instead of ‘usage or consumption’ warrants a revisit to prevent loss of input tax credit.

The CGST Rules[2] limit income tax credit refund based on export turnover being 1.5 times of the domestic turnover. This limitation may be revisited because there are conditions in which the export market appreciates the sale price of goods. GST reforms in India should take a re-look at refund provisions to avoid such limitations and restrictions.

Indirect tax reforms must include the healthcare sector as well. Recently, in July 2022, the GST Council has recommended 5% GST rate on bed charges where room rent is above INR 5,000 per day per patient (excluding ICU). Since healthcare services are exempt from GST, an artificial bifurcation to tax bed charges is against the spirit and concept of ‘composite supply’.

This section is written by Suresh Nair, Partner, Indirect Tax, EY India.

GST on supply of electricity
(Chapter breaker)
2

Chapter 2

GST on inputs in the power sector

While GST has reduced costs associated with manufacturing and distribution for most sectors, the indirect tax reform’s efficiency can be further improved in sectors, such as power and pharma.

GST, India’s most transformational tax reform in recent times, celebrated its 5th anniversary on 1 July 2022. After five years of GST tax reforms in India, the next phase of the indirect tax should focus on ironing out inefficiencies, which may not only benefit the sectors but also improve the GST reforms’ economic impact.

Given the indelible role that the power sector plays in India’s economic growth, especially the bigger share that renewable energy is likely to have in this, there is a need to further fine-tune GST rules.

Supply of electricity is exempt from GST and so is transmission and distribution of electricity by a transmission and distribution utility. However, goods and services procured for these activities — such as for setting up of power plants, transportation, outsourcing of workforce manpower requirements, etc. — are subject to GST in India. In the absence of any output liability, GST paid on procurement is a cost to businesses and has a direct impact on the profitability of such companies.

In renewable energy, exempting all procurements from GST would cause credit blockage in the hands of the suppliers, which would have larger ramifications.

Therefore, the demand of the power industry is to bring the activities of power generation as well as distribution and transmission of electricity within the ambit of GST.

Levying GST at a lower rate (say, around 5%) is suggested as it permits the units generating electricity to apply for refunds on account of the inverted duty structure. A similar scheme could be implemented for units engaged in transmission and distribution of electricity. Such a measure would help these businesses reduce costs and provide electricity to consumers at reduced tariffs. 

This section is written by Achal Chawla - Partner, Indirect Tax, EY India.

 

Impact of GST on MSME
(Chapter breaker)
3

Chapter 3

GST streamlined taxes for Medium, Small and Micro Enterprises (MSMEs)

GST has given many MSMEs a fillip through its uniform tax structure.

An integral component of the nation’s backbone, MSMEs, are ubiquitous in nature and the largest employment generators in India. Their contribution to the nation’s GDP and exports are key reasons why the federal and state governments have been introducing measures for their sustained growth. The introduction of GST for MSMEs has positively impacted the sector.

During the VAT regime, tax compliance costs and burdens were higher for MSMEs. This was largely due to the multiplicity of taxes, cascading levy, high rates, and numerous compliances. The impact of GST on MSMEs was big, as most taxes were subsumed, and a uniform process was established. A key GST benefit for MSMEs is the composition scheme that allows smaller businesses to pay a fixed rate (1–6%) on their turnover without the hassle of paperwork. Other changes, such as mandatory audit exemptions, registration thresholds, reduction/exemption of GST on goods made by MSMEs, were also implemented. As a result, MSME GST registrations have seen an uptick.

In July 2020, a crucial change was enacted when the core definition of an MSME was revised. Prior to the amendment, units with an investment in plant and machinery up to INR 10 crore qualified as MSMEs. However, the change has made the category far more inclusive, as it now encompasses all such investments up to INR 50 crore and turnover up to INR 250 crore. As a result, more units can avail of the benefits available to MSMEs. 

The development of the MSME sector is a clear sign of the set priorities of the government. Their continued support is the key to a holistic development of industries and people.

This section is written by Bhavesh Thakkar, Partner, Indirect Tax, EY India.

Summary

There is no doubt that when the Indian history is written a few years later, GST reforms may be viewed as catalysts that drove development and growth. These are initial years and further nurturing is required to enable the baby to mature and become a forwarding-looking, amiable adult who contributes to the general wellbeing of the society.

About this article

By Uday Pimprikar

EY India Partner and National Leader – Indirect Tax

Specializes in indirect tax and policy advisor on some of the marquee transaction operations in the country. Avid reader.