GST: An unappreciated reform

Goods and services tax (GST) is three years old and the headline narrative largely seems to portray it negatively. A dispassionate analysis of its evolution, landmark Constitutional amendment of 2016, impact on Centre-state finance, and the data analytics reveal superior merits of this reform outweighing glitches in its implementation. It is, therefore, appropriate to turn back and revisit what GST has in fact attained. 

Scores of hours wasted at the state borders waiting for check post clearance, disproportionate and inflationary entry taxes, inconsistent state policies, unintelligible and arbitrary imposts, multiplicity of taxes both at the Central and the state level, fiefdom of ground- level officials, regimes mired in disputes. This analysis is not a plot of a horror movie but the reality of what indirect tax regime was for seven decades of its existence since independence. The introduction of GST replaced all such evils on the side with introduction of a rule-based tax regime which resonates in every corner of the country. 
 

Unthinkable, yet achieved. The cascading effect of taxes owing to crisscross and delinked taxes, which were officially acknowledged but never addressed, is a thing of the past. There is no incentive today to artificially characterise a sale as one on inter-State basis to get over higher taxes on a local sale, owing to its parity introduced by GST. 

On the policy front, the GST Council has achieved what no institution could ever achieve in the country, be it executive or judicial. By emphasising upon dialogue and adopting a consensus- driven approach, the GST Council has instilled a culture of civilised debates to address Centre-state and state-versus-state issues, which had so far been missing in Centre-state tax revenue frictions, a hall-mark of a working federal relationship. Let us take three examples to exemplify this trend. 

Notwithstanding the urgent need for resources to address the natural calamity, the Kerala government did not effectuate its ‘flood cess’ until all the stakeholders were aligned, a coherent tax-policy was developed and a rule-based order was set in. An example unthinkable in the past where each state was a master of its own design. In yet another example, despite the extreme positions in approach between production-states and consumption-states, the Council has successfully ensured against levy of ‘sugar cess’ and withstood pressure from multiple states. In a third example, though it was the first and only time that the GST Council had to resort to voting to resolve an issue, the fissures between the north-eastern and other states regarding rate of tax on lottery tickets, stands resolved and there is a consistent regime across the country. These are no mean feats but such oddly these achievements are undermined in popular discourse. History of landmark reforms suggest that as civilisations advance, so should institutions and actors. GST Council has demonstrated its ability for resolving differences with maturity moving beyond personal agendas and prejudices. 

In the pragmatic realm, the avid criticism that GST has got is essentially on three counts. First, the detention and seizure of goods during their movement. No doubt there were vast number of such instances in the early days of GST implementation which also invited judicial scrutiny. However, the CBIC, as the pivotal administrative board, sought expedited indulgence from GST Council and issued a series of directions to unveil standardised procedures to arrest such trends. Besides, training of officers also helped this cause. The second relates to inadequacy of GSTN, the technology backbone, to ensure smooth compliances. 

 

While the administrators beef up the technology competence, on its part, GST Council has significantly reduced the compliance requirements and this aspect is under constant active consideration. At the same time, however, one must recall the pains in manual compliances across the length and breadth of country, which have been obviated by GSTN which offers the comfort of compliance from-home, to value the advancements of GST. The third, and perhaps most vocal, is the state of play amongst the GST Authority for Advance Rulings. No doubt there have been some rulings that raise eyebrows; levy of GST on executive directors, higher tax on processed parathas (a popular Indian staple bread), being  notable recent examples. However, the reality lies somewhere in the middle. 

One needs to appreciate that many rulings have been pronounced in peculiar facts presented to the authorities and thus, the play of a known legal maxim — hard cases make bad laws. In some instances, law makers have intervened to correct the anomaly (GST on Directors) and in some, justified the stand of AAR (higher levy on Parathas) which also reveal that there are fundamental differences in the GST design from the earlier laws. Ensuring against divergence of views amongst the AAR and coherent course-correction mechanism remains to be a work in progress. It is crucial to highlight that GST implementation has turned into reality an outcome which was earlier confined to academic discourse-deployment of technology and tax analytics to seek solutions, benefits of which are enormous from a public finance and policy perspective. An increasing number of arrests mostly linked to fake invoices and detection of massive tax evasion are prime examples of success of the system. It is only when the evasion is quantified in such cases that one realises the extent of parallel economy and inadequacies prevailing in the regime preceding the GST. Formalisation of economy is a crucial step to nation-building and core to any states public policy.

If one were to analyse the shift from the pre-GST era, it is evident that both from a policy perspective and technological front, attainments are quantitatively and qualitatively far many and laudable. No doubt, in the times we live in, it is a work in progress. It is undeniable that our future generations will be remain overawed and continuously ask us that how did we managing to transact and live before GST. It is important to remind ourselves of these underpinnings before we criticise this real reform.

Partners, BMR Legal. Views are personal