India Prime Minister Narendra Modi has called the new Goods and Services Tax (GST) the “good and simple tax.” But is GST, recently launched on 1 July, really as simple as it’s made out to be? Let’s take a closer look.
Complexities of GST
In the eyes of government officials, GST involves filing a single return, not three — because two of the three required monthly returns are auto populated. However, while Form GSTR-2, the record of purchases, is partially auto-populated, it requires a lot of manual entry — imports, reverse charge payments, and more.
Submitting invoice-level data is a big compliance burden in and of itself, and that data must be matched to vendor data to confirm tax credits.
A service unit client of mine with operations in 20 states was previously filing two returns a year for all operations across the country. Now the same client will end up filing 740 returns a year according to my estimations, and 260 returns according to the government. Either way, it’s definitely not an example of simplification.
While I fully appreciate that this kind of detailed compliance is necessary in order to electronically match credits, it is still a compliance burden for many.
Multiple tax rates
Like France, India now has four tax rates: 5, 12, 18, and 28 percent. This helps reduce the fundamental regressive nature of indirect taxes.
But with multiple rates come multiple disputes. Take, for example, annual maintenance contracts or warranty services, such as those on new vehicles, appliances, or machinery.
Many would view warranty repairs on a refrigerator as a contract of service, even if some parts are replaced. But the issue is that many parts generally attract 28 percent tax while services attract 18 percent. Is this a mixed supply and therefore liable to the highest tax rate, or a composite supply of service and therefore liable to 18 percent? It’s not a simple situation.
The law requires delivery challans in all cases of transportation, even when there is no supply involved. When a car manufacturer sends his cars to the regional transport office for registration, for example, he must issue a delivery challan. It’s an inconvenience perhaps. But consider a testing lab that receives thousands of samples a day, some of which they send to other labs for further testing. Creating delivery challans for each one is going to be nothing short of a nightmare.
These are remnants of the excise regime, which often required documentation of goods moving out of the factory. But are they relevant in this new simpler tax regime?
Bond and LUT
Excise had an elaborate procedure for exporting goods with ARE-1s, with bonds and proofs of export properly prescribed. Services had it easy since there was hardly any risk of diversion to the domestic market as is the case with goods. In fact, being intangible, exported services went largely unnoticed. But now services and goods alike require execution of a bond or a legal undertaking (LUT) before export. However, at this time, the instructions for this are only partly formed, holding up exports in some cases.
Except in service tax, advances were never taxed. If the tax is on the supply, there is no reason why advances should be taxed, especially as they create a compliance hazard. Often companies get ad hoc amounts as advances. They are not only now supposed to pay tax on such advances but also track them through returns. If advances are received and squared off in the same month, they will be easy to deal with. But when they spill over into additional months, it creates a big burden.
Export oriented units (EOUs) will likely want to evaluate whether they want to continue as EOUs in the new regime, now that they are required to reverse the basic customs duty benefit they receive on imported goods. This additional compliance requirement was made known only recently, making it difficult to configure in companies’ IT systems before GST went live on 1 July.
Glitches with ERP systems, even with some well-known names, held up invoicing on the first day. These ERP vendors could not test their GST patches adequately and communicate with their customers enough due to the government continually changing the GST rules and regulations up until the last day of June.
The registration window for the GST Network (GSTN) didn’t open until 25 June, and new applicants like those required to take up separate Special Economic Zone (SEZ) registration were stuck with some query or issue. Of course, in many cases, these were resolved at great speed, but others are still searching for a resolution.
What’s “good” about this tax?
The two most distinctive features of Indian GST are the Integrated GST (IGST) and the online credit matching.
India is a union of states, and each state has taxation power, thus resembling the European Union and its member nations. When goods and services move across these states, they could have been treated as exports, requiring huge effort to settle refund claims. Instead, India devised a system of IGST where tax flows with the goods/services seamlessly to the other state.
Refund situations are therefore limited only to exports and inverse duty structure, reducing the load on tax offices and also avoiding possible allegations of misuse of power and corruption. It’s a big step towards ease of doing business and transparency.
IGST also necessitated electronic credit matching, which means that the customer will not get tax credit until the vendor deposits the tax with the government and it is reflected in the GSTN. This eliminates the possibility of credit being grant on bogus invoices. Additionally, it creates an ecosystem that strongly supports recorded economy against the cash economy. The GSTN will now reflect the purchases of a taxpayer, making it difficult to evade the government’s watchful eyes.
Another excellent provision is charging tax on a reverse charge basis if purchases are made from unregistered dealers. This puts unregistered dealers in a disadvantageous position — taxpayers will find themselves handling more of the compliance burden themselves when working with such dealers. Unscrupulous dealers who never registered even after crossing the threshold will now want to register to remain attractive to buyers.
These three factors — IGST, electronic credit matching, and reverse charge — are crucial to India realizing its true potential as a result of the new tax regime. It is now up to the taxpayers to take the cue and mend their ways of doing business. The government, too, must take action to be more proactive and open, as it has been in the past few months, and to update the GST law to really make it “simple”.
Avalara is an experienced application service provider (ASP) and partner of authorized GST Suvidha Providers (GSPs). To understand how our cloud-based application Avalara TrustFile GST can help you with GST compliance automation, contact us through https://www.avalara.com/in/products/gst-returns-filing.