GST reforms shaping India's economic future

The introduction of the Goods and Services Tax (GST) in 2017 marked a pivotal moment in the nation's economic history, fundamentally reshaping the indirect tax system by unifying multiple taxes into a single, streamlined framework. It replaced a complex structure of indirect taxes like Service Tax, Central Excise Duty, and Value Added Tax (VAT) with a comprehensive taxation system, with the objective of simplifying compliance and enhancing the ease of doing business (EoDB) across the country.

One of the most noteworthy accomplishments of GST has been its role in simplifying and expediting company compliance. Prior to its implementation, businesses contended with a complicated network of indirect taxes levied by both central and state governments, which created confusion and raised compliance costs. The transition to an automated and digitised tax system enhanced compliance efficiency, facilitating tasks such as submitting returns, matching invoices, and making tax payments online.

 

Despite the positive strides made under the GST regime, various sectors continued to face ongoing tax challenges that hindered their growth and operational efficiency. For instance, Micro, Small, and Medium Enterprises (MSMEs) and the manufacturing sector grappled with issues related to Input Tax Credit (ITC) and compliance burdens. Smaller businesses found the complexity of maintaining accurate records and filing returns burdensome. While GST was intended to simplify these processes, MSMEs struggled with compliance due to the intricacies involved.

The IT sector also faced significant challenges, particularly the increase in the cost of software services due to the 18 per cent GST rate, higher infrastructure, and administrative costs. These increased costs strained resources, especially for smaller IT firms.

The e-commerce sector similarly encountered significant challenges concerning Tax Collection at Source (TCS) and Tax Deducted at Source (TDS). The requirement for e-commerce operators to collect tax on behalf of the government led to confusion and compliance difficulties, especially for smaller platforms that lacked the infrastructure to manage these obligations efficiently. Additionally, sectors such as shipping, foreign airlines, and online gaming face retrospective tax demands, creating uncertainty and apprehension among businesses.

Recognising these ongoing challenges, the government and the GST Council have taken commendable and proactive measures to address the concerns of various sectors through recent amendments introduced during the recent Budget and the 53rd GST Council meeting. The measures reflect a strong commitment to enhancing the ease of doing business while providing much-needed relief to the affected industries.

Among the notable amendments introduced by the GST Council is the reduction of Tax Deducted at Source (TDS) for e-commerce operators from 1 per cent to 0.1 per cent. This change will alleviate the compliance burden on these businesses, particularly benefiting small and medium-sized firms. By lowering the TDS rate, the government is enabling e-commerce platforms to retain more capital for reinvestment, fostering innovation and growth within the sector. Additionally, the reduction of TDS from 1 per cent to 0.5 per cent for other sectors is expected to ease financial pressures across various industries, including hospitality and services. Collectively, these amendments reflect the government's responsiveness to the evolving needs of the digital economy and its commitment to fostering a supportive regulatory environment that enhances the ease of doing business in India.

For MSMEs and manufacturers, the extension of the time limit for claiming ITC is a significant relief. It allows businesses more flexibility in managing their tax credits, thereby reducing the immediate financial strain associated with compliance.

Furthermore, the introduction of Section 11A seeks to address the ongoing challenges faced by various industries that have reached alarming levels. Such demands arose because these sectors paid GST at lower rates based on common trade practices and a bona fide understanding of the law. Section 11A provides much-needed relief by allowing these industries to seek exemptions from retrospective tax demands when they have complied with the prevailing rates and empowers the GST Council to provide relief to industries from tax demands. This amendment is particularly crucial for the shipping and airline sectors, which often operate on thin margins and face significant operational costs.

These proactive measures by the government not only demonstrate a commitment to addressing the diverse needs of various sectors but also reflect a broader vision of fostering a business-friendly environment under the GST framework. The speed at which the tax demands to Infosys were resolved is a sign of a proactive and business-friendly government and tax governance.

As India continues its path toward becoming “Viksit Bharat” (Developed India), these efforts are integral to creating an ecosystem where businesses can thrive, innovate, and contribute to the nation's economic growth. The GST framework, while still evolving, holds the potential to further streamline operations, reduce costs, and ultimately position India as a competitive player in the global market. Additionally, the government's proactive steps in addressing sector-specific challenges and enhancing the overall business environment will help in improving global investor confidence, leading to increased Foreign Direct Investment (FDI) inflows. With this commitment, the future looks promising for Indian enterprises navigating the complexities of the GST landscape.

---

(Dhanendra Kumar has served as the first Chairman of the Competition Commission of India, Executive Director at the World Bank for India, Sri Lanka, Bangladesh, and Bhutan. He is currently Chairman of Competition Advisory Services India LLP)

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper.