GST's maiden quarter: A three-month learning experience

In the three months since its roll-out, the goods and services tax (GST) has not led to a spike in prices of essential commodities or shortages, but it has made the lives of small and medium enterprises (SMEs), as well as exporters, uncomfortable.

Changes in rates for some sectors reflect flexibility in the system to adjust to emergent needs, but these have also irked certain segments such as automobile companies. 

Companies are also wary about anti-profiteering provisions and the yet-to-be-implemented e-way bill. 

Consumer price index-based inflation, however, did rise to 3.36 per cent in August from 2.17 per cent in July. Inflation in the pre-GST months of May and June was 2.18 per cent and 1.46 per cent, respectively. As companies offered big discounts in June due to jitters over the GST roll-out the next month, inflation that month was unusually low. July and August saw inflation rising largely because of food prices, particularly those of tomatoes, and not due to the GST. 

A shortage of tomatoes was largely a seasonal phenomenon of the rainy season.

Pre-GST destocking by companies was largely blamed for the growth in the gross domestic product (GDP) declining to its lowest during the Narendra Modi government’s three years in office, to 5.7 per cent in the first quarter of 2017-18. The lingering impact of demonetisation was also cited as a reason but it was largely pre-GST nervousness that throttled economic growth. 

The crucial issue is whether GDP growth will slow down further in the current quarter. It is difficult to hazard a guess in the absence of large official data but services growth shrank both in July and August, as did manufacturing in July, according to the Nikkei Purchasing Managers’ Index (PMI). These two sectors constitute about three-fourths of India’s economy. Though the PMI does not move in step with the official data, it provides broad indications. 

The Index of Industrial Production (IIP) rose just over one per cent in July, after contracting in June. The finance ministry believes destocking would have occurred in July as well. Destocking does not necessarily have a negative impact on GDP growth, as it leads to a lowering of manufacturing value addition but also causes a rise in services. However, discounts affect the margins of traders and dealers, affecting the GDP.

The ministry was waiting for August GST revenues to arrive at a rough assessment of the economy in the first two months of  implementation. However, August revenues did not suggest a recovery. The GST yielded Rs 90,669 crore in August, a little lower than the Rs 94,063 crore in July. This is also lower than the Rs 91,000 crore which should have come to the Centre and states in a month, going by the Budget estimates and assumed growth rates in receipts for 2017-18. 

The revenues were affected by fewer assessees paying taxes in August. If one takes the percentage of assessees paying taxes, the number fell even more drastically — the difference being 10 percentage points between  July and August.  

This is a bit surprising, since the GST Network (GSTN), responsible for the technology framework of the GST, has improved its system after the bitter experience of July. The system crashed on two occasions earlier this month when supply returns for July were being filed. 

One taxpayer filed 2.5 million invoices separately, even when these could have been clubbed with the Taxpayer Identification Number (TIN) of buyers. The system then was that assessees were supposed to provide the TIN of a buyer and then upload invoices related to that TIN before going on to the next set. The system could not cope up with this particular taxpayer’s invoice uploading without TIN.

After state finance ministers complained, the GST Council set up a group of ministers (GoM) under the chairmanship of Bihar Deputy Chief Minister Sushil Modi to resolve issues with the working of  the GSTN portal.  The group is going to meet every fortnight to resolve two dozen technical glitches identified. The issues relate largely to payment and registration. Deadlines for filing various returns for July were also extended.

Abhishek Rastogi of Khaitan & Co. says, “The first three months of the GST have not been easy for either the government or taxpayers. However, it should be kept in mind that this reform was supported by all stakeholders and some teething problems were to be expected.”

A GSTN official says the issues identified by the GoM have been largely fixed. 

That being so, why has the number of assessees paying tax declined in August, compared to July?

“Ideally, the GSTN should have been given more time for testing the system, which did not happen because laws were being finalised till the last moment,” says Pratik Jain of PwC.

He adds there is a general consensus that the GST is good but not as simple a tax as it was expected to be. 

Vishal Raheja of Taxmann says much effort has been expended by the government, but a lot more needs to be done to improve infrastructure and the GST website.

Complexity of the GST system has particularly scared exporters and SMEs. While exporters are concerned about refunds for taxes paid on inputs and documentation, SMEs are wary about procedures, filing of  returns, how to receive input tax credit and forced registration despite their annual turnover being below the GST threshold. 

“Due to the reverse charge provision in  purchase from unregistered vendors, large buyers are insisting vendors register even when their annual turnover is less than Rs 20 lakh,” says Jain. 

Anti-profiteering measures have come into force from July 1 but the authority is yet to be set up and guidelines on how to calculate profiteering are yet to be notified. Profiteering implies not passing the benefits of the GST regime to customers. 

A four-member standing committee comprising tax officials of the Centre and states has been set up to receive complaints of undue profiteering by any entity. 

Also, the e-way bill is likely to come into effect from the next month. This means every registered agency must furnish information on the GSTN related to the movement of goods worth over Rs 50,000 if carried by motor vehicles beyond 10 km. The purpose is to track the movement of goods and allow the authorities to inspect them on suspicion of evasion. This has not gone down well with industry, which says it is against the GST objective of one nation, one market.

“Guidelines on the manner in which anti-profiteering provisions are meant to apply have not been issued, leading to concerns in industry. There is also concern about implementation of the e-way bill provisions,” says Jain.

In between, the GST Council raised the cess on cigarettes after it found that companies were making windfall gains, tweaked rates on 30 items, including segments of textiles after traders in Surat went on strike, and raised the cess on large and luxury cars and sports utility vehicles. These measures have pleased some and drawn flak from others. 

However, slabs remained broadly at zero, 5, 12, 18 and 28 per cent with a cess over the peak rate on demerit and luxury goods. However, hopes were raised by Finance Minister Arun Jaitley and others that the 12 and 18 per cent rates could merge. 

The decision to raise the cess on cigarettes was made at a GST Council meeting through video  conferencing. The next meeting in October will also be a video conference, reflecting that the government is not only using technology in the GSTN, but also in arriving at decisions.