4 minute read 8 Jun 2020
COVID-19 measures - GST

Countering COVID-19: A GST perspective

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.

4 minute read 8 Jun 2020

GST collections for the first quarter of current financial year are expected to be a washout.

COVID-19 got its ignominious pandemic status from the World Health Organization on 11 March 2020. However, the global economy has already caught the flu. India got directly afflicted only in March and given the lockdown, tax collections (including GST) in the first quarter of this financial year is expected to be a washout. The fiscal implications are not minor.

The pandemic is evidently an unprecedented crisis. Past crises were primarily financial in nature, which in turn impacted the other spheres of economic activity. The current one is primarily driven by cessation of economic activity and is threatening to turn into a massive financial flu.

The government has taken several steps to ensure that the financial contagion is arrested.  Similar proactive measures in GST are perhaps imperative regardless of the fiscal strain.

Decoupling the GST chain

GST rates in India are fairly high and to ensure compliance, the prescribed framework is rigid. A taxpayer cannot file returns unless they pay the entire tax due. Moreover, a customer is allowed input tax credit, to the extent that their supplier has paid taxes to the government. Further, unlike bulk of the GST world, India does not give any leeway to adjust tax liabilities in case of bad debts. It is evident that such an interlinked ecosystem has the potential of exacerbating the expected ensuing financial crisis and needs to be decoupled. 

To enable this, the following needs to be done:

  • Delinking payment of taxes from other compliance requirements and allow taxpayers an ability to pay taxes after a moratorium and in instalments.
  • De-risk a taxpayer from the defaults of other stakeholders in the supply chain.  Allow a taxpayer to collate credits basis invoices received and permit adjustment of taxes in case of debt defaults.
  • Keeping in abeyance several amendments notified recently for exports. Just before the pandemic hit the economy, the government had notified amendments in relation to export refunds, disallowing refunds where consideration was not received. This will result in importing the global financial turmoil and materially impact Indian exports. 

Cash conservation

At present a taxpayer needs to pay their tax liability both on their sales and some defined procurements (such as imports). In most cases, the tax payable on procurements is akin to an advance payment of taxes, as taxpayers are entitled to claim input tax credit. There is an urgent need to relax norms that necessitate this advance payment. Taxpayers should be allowed to utilize accumulated credits for payments of both output and input taxes (reverse charge).

Release refunds and incentives

Administration has been proactive in the release of GST refunds related to exports. However, there is a need for more to be done to ensure a more pervasive efficient administration of refunds. To this end, a campaign to drive refunds needs to be initiated at a structural level. Clarifications and instructions on issues that impede refunds should be issued and a robust mechanism to continuously removing roadblocks are required.

Survival and revival equally relevant

The government is looking at formulating financial stimulus and this could include deferral of tax payments and remission of taxes paid linked to employment. In this regard, ensuring availability of cash to sustain operations and investments is important.

Further, some of the impacted sectors are not going to witness any reasonable revenue at least for a few months. Their stress needs to be contained. Financial support can be given by as removing elements in the GST legislation that lead to cascading taxes. This includes considering micro elements such as expanding avenues that allow refunds of blocked input tax credits and inverted duties as also reducing the list of disallowed credits such as input tax credit of taxes paid on inputs that go into construction of civil construction such as airports, leased commercial buildings, as also macro reforms such as expanding the ambit to GST to include sectors such as aviation turbine fuel, petroleum and real estate.

It is important to acknowledge that the changes in supply chain forced by the crisis come bearing opportunities. Incentives and schemes - encouraging production and employment, such as accelerated credit/refund regime, instituted under the GST law are effective. Similar schemes under the erstwhile VAT and excise laws have driven a lot of growth and investments in the past when conceptualized well. There are credible examples of the same and therefore should be considered.

(Sonam Bhandari, Senior Manager, Indirect Tax, EY India also contributed to the article).

Summary

The government has taken several steps to ensure that the financial contagion is arrested. Similar proactive measures in GST are perhaps imperative regardless of the fiscal strain.

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.