GST changes at Guwahati
V S Krishnan, National Leader, Tax & Economic Policy Group, EY India
In public finance, a common saying is that tax administration is 70 percent tax policy. Happily in Guwahati, this taxation truth was accepted and the changes announced will help to make GST what the Prime Minister called ‘a Good and Simple tax’.
First of all let us look at the important area of rate rationalization. Earlier the rate fitment committee, based on the guidelines of GST council, sought to fix GST rates on various items based on the principle of ‘duty equivalence’. This led to a large number of consumer items being placed in the 28 percent duty slab. This created a lot of incongruities – washing soap was kept at 18 percent while washing powder was placed in the 28 percent rate slab. The GST council at its Guwahati meeting on 10th November abandoned ‘duty equivalence’ as a principle.
The GST implementation opportunity ought to have been used to completely realign rates on the basis of certain principle like broad base of consumption, avoiding high rates of duty on inputs/intermediates to prevent accumulation of duty credit on account of inverted duty structure and prescribing low GST rates on goods produced by small and medium enterprises. The rate setting in the past few GST council meeting culminating in Guwahati has through a process of trial and error converged to a simpler and more rationale rate structure. The incidence of indirect taxation right across the manufacturing sector has probably dropped, after changes in Guwahati, by between 5 to 10 percentage points. This will help boost manufacturing growth by stimulating demand and creating an expanded market. The removal of entry tax, post GST implementation, contributed to this salutary trend by reducing the costs of inter-state trade compared to intra-state trade. The simpler tax structure will make tax administration easier in a number of ways. It will reduce classification disputes through convergence of rates; disputes about what is a ‘good’ and what is a ‘service’ would be obviated. Further litigation may also come down.
The other big take away from the Guwahati meeting was the recognition that the GST implementation did impose a compliance burden on small and medium enterprises, especially the mom and pop stores, operating locally, in the B2C segment. This segment has been broadly covered under the composition scheme. These units under the composition scheme up to an annual turnover of INR 1.5 crore will pay a flat rate of 1 percent (covering both traders and manufacturers). These units file a quarterly return which is simple and are also exempt from the whole process of invoice matching as they fall outside the input duty credit scheme.
The restaurant segment is an extremely important segment in India for it employs a large number of people and significantly contributes to the gross value addition in the services sector. The entire restaurant sector except the restaurants located in hotels where room tariffs are more than INR 7500 per day have been placed in the 5 percent duty bracket (AC and non AC distinctions have been done away with). The only caveat is that this sector will not be eligible for taking ITC – a price they have been asked to pay for not passing on the input tax credit to consumers soon after the GST implementation on the 1st of July. Certainly this policy will go against the grain of the GST system but perhaps the Government here wanted to send a stern message that profiteering at the expense of the consumers will have consequences.
Finally the decisions at the Guwahati meeting also addressed the main concern that the GST regime placed a significant compliance burden on small and medium enterprises. The elaborate design of the invoice matching system based on sequential filing of GSTR-1, GSTR-2 and GSTR-3 has been temporarily postponed. A committee under the CEO of GSTN has been constituted to relook at the design of the GSRTR 2 and GSTR 3. Matching of invoices will be done at a summary level with the GSTR-1 and GSTR-3B until March, 31, 2018
In short, the GST meeting in Guwahati was in some sense a watershed moment where the government has done some much needed course correction.
(Views expressed our personal)