The completion of the four-year Goods and Services Tax (GST) is a good time to consider the benefits it has brought and the challenges it has brought, the latter magnified by the century-long pandemic. The GST must be judged in the right context. Major reforms are an ongoing process, and new legislation that has combined several complex central and state legislations cannot work seamlessly from the start. It may take a few years to achieve all of its goals and realize its full potential.
There has been considerable debate lately over whether the GST has met its revenue targets and whether states are receiving their fair share of the revenue. While GST collections have certainly been affected by the economic contraction brought on by the pandemic, recent months have seen an encouraging turnaround in collections, providing some relief in the tax space.
Several States have experienced difficulties in managing their budgetary situation and have asked the Center to intervene to help them. The Center also encountered difficulties in managing the compensation provided to States from the Compensation Fund (CCF) collected on certain products and borrowed to finance the CCF deficit.
It is also likely that the original five-year period for the CCF will be extended to help close the gap and repay loans during the current period. This would place an additional burden on businesses whose products are subject to the countervailing tax, such as automobiles, as these businesses felt that the countervailing tax would end in June 2022 and that they would only be subject to the applicable GST. . after. Therefore, the only long-term solution to the state and central financial problems appears to be a significant improvement in GST collections, driven by above-average economic growth and increased attention to improving compliance. the GST.
Several businesses have struggled to comply with the GST and its increased requirements. Although the goal of the GST authorities has been to broaden the base of GST taxpayers and ensure that they pay the right amount of taxes, it has unintentionally affected many organized and unorganized businesses. While large businesses are able to handle some of these issues, small and medium businesses have found it extremely difficult.
It is essential to note that the GST is a tax related to business transactions and its compliance is integrally linked to fundamental business processes such as sales, procurement, logistics, etc. Therefore, any action taken to improve compliance also impacts core business processes which are primarily driven by customer requirements, market practices and business necessities.
For example, allowing businesses to claim input tax credit (ITC) only in cases where the seller has met their GST payment and compliance requirements creates an additional level of workflow that every business now has to do. monitor. Additionally, many companies are really unable to monitor the behavior of their suppliers and feel that they should not be penalized for their suppliers’ tax compliance deficiencies once they have paid the amounts. GST to their suppliers. Additionally, the requirement to cancel the ITC used if the seller is not paid within six months makes it difficult for companies operating in an extended working capital cycle with agreed payment terms beyond. six months that are tied to the client’s final payments.
Service providers are grappling with increased compliance needs – registering and completing declarations separately in each state in which they operate. They have not received any relief under GST compliance because it does not distinguish between suppliers of goods and suppliers of services. This required all service providers to strengthen their internal teams dealing with GST, increase their interactions with tax advisors, expand the use of technology for tax compliance, etc., resulting in an increase in their numbers. costs of providing services to their clients.
Many of their customers are unwilling to absorb this, forcing service providers to cut their margins just to keep business going. It has also been difficult for service providers engaged in the export of their services to obtain reimbursement of the input taxes they paid to their suppliers due to the increased and automated control process to which these reimbursements are now. submitted.
One solution could be to allow service providers to file consolidated returns for the states where they are registered as well as aggregate tax payments, which can then be distributed among states by the supported IT processes.
Continuous improvement in GST compliance and tax processes based on consultations with stakeholders has been a hallmark of GST reform in India, and this is expected to accelerate once the current situation improves. .
Senior Director, Deloitte India