17 Dec

GST

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Content

• Key Features
• Advantages of GST
• 6 Years Analysis of GST and Key Suggestions for Improvement
• GST on Gaming Sector

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Introduction

• The GST is the most important indirect tax reform in recent years and it carried VAT to its logical conclusion. It was passed by Parliament in Aug 2016 through the 101st Constitutional Amendment Act and was rolled out from 1st July 2017.

Key Features:

• It has subsumed several indirect taxes at central and state level and acts as one indirect tax for the whole nation on the supply of goods and services.
• Avoids Cascading of taxes through input tax credit (ITC) mechanism.
• It is applicable on supply of goods and services instead of earlier concept of tax on the manufacture or sale of goods or on provision of services. It is a destination-based tax. Earlier indirect taxes were origin based.
• GST is a dual tax and centre, and states are simultaneously levying it on a common base.
• An integrated GST (IGST) is levied on inter-state supply of goods and services.
• Imports of goods or services are deemed as supply of goods or services or both, in the course of inter-state trade or commerce and thus attract IGST.
  • Note: Basic custom duties which were levied on import of goods, continue to be levied
    in addition to IGST on imported goods.
• Exports are zero-listed.
• GST Council is a federal Constitutional authority created to give recommendations on the rates of taxes on different goods and services. It is chaired by Union Finance Minister.

Advantages of GST

i. For Business and Industry-> Easy compliance (online filing, single tax, less chance of harassment); Uniform tax rate (common national market, easy expansion); Removal of cascading (reduction of total tax payment); Increase competitiveness; gain for manufacturers and exporters.

ii. Advantages of Government (Center and State) -> Easy administration (Single Tax, end to end IT system); Better control over leakage (robust IT infra, simple tax structure -> easy compliance); Improved tax base; A more transparent basis for apply WTO’s National Treatment Principle; Higher revenue efficiency (less cost of administration); Spur economic growth; Reduced corruption; Promote cooperative federalism (In GST system center and states work together for the nation’s benefit).

iii. For Consumers/citizens -> Cheaper goods and services; Higher revenue efficiency-More money with government -> More social initiatives; increased resource for resource consuming states (as this is a destination-based tax).

6 Years Analysis of GST and Key Suggestions for Improvement

Positives:

• Tax base has increased (Update)
  • Average monthly GST collections has increased to 1.55 lakh crore in 2022-23.
  • Number of GST taxpayers have increased from 70 lakh in FY18 to 1.4 crore in FY23.
  • Small businesses and informal sectors initially faced some issues, but many of the jumped to the tax net to take advantage of ITC.
  • GSTN, as a common technology platform has simplified tax compliance. It provides a one stop solution where key business process registration, payment of duties and filing of returns are done online in a transparent manner.
  • Action taken against tax evaders, including steps being taken by tax authorities, has resulted in better compliance and helped push the growth in GST collection.
• Facilitated free movement of goods and services and Increased efficiency of logistic supply chain:
• Reduced Tax Burden: Overall tax on many essential use items have come down. Further, with
  input tax credit the cascading has been reduced.
• Push for Cooperative federalism: GST Council has played a crucial role in forging a national consensus on key issues related to tax regime – rates, exemptions, business, processes, and
  movement of ITC.
• System has evolved to simplify tax compliance for MSME sector: Recently, threshold
  exemption limit was increased form 20 lakh to 40 lakh for goods and Quarterly Returns and
  Monthly Payments (QRMP) system was introduced.
• Tax Evasion has reduced:
  • E-Invoicing has become an integral part of doing business in India.
  • The GST number that can track every supply chain transaction has helped to address fraudulent claim.
  • Coordination between CBIC and CBDT has increased to ensure easy compliance.

Negatives/Limitations

• Federal Issues:
  • Fiscal Autonomy reduces for states and ULBs – states now have limited scope to raise their own revenue. ULBs are also much weaker and more dependent on state grants.
  • It harms the producer state and reward the consumer state in terms of revenues.
    • States like TN which have invested heavily in their manufacturing ecosystem are not facing revenue challenges. GST compensation period has also ended. After the end of GST compensation, fiscal strain is expected in state budget as the median growth rate of subsumed tax in many states are much lower than 14%.
• GST Council decides the increase or decrease of tax rates. Earlier, these powers were only with Parliament/state legislatures.

Criticism of keeping some items out of GST Net.

• This goes against the principle of ‘One nation one tax’. It also allows continuance of cascading.
  •  Further, sectors like airline industry is not able to get credit for taxes paid of jet fuel.
  • Major black money generating sector such as real estate are out of the GST regime
• Multiple Rates and Cess -> not a simple tax
• Advanced Economies like USA have also not moved onto GST path yet: It is mostly due to their federal structure and federal autonomy.
• Large businesses/units are reluctant to purchase from MSME sector as they don’t get ITC.
• Delay in establishment of Appellate tribunal related to GST is increasing the burden on Judiciary. Trapped GST refunds and numerous court cases are alarming.

Way Forward:

• GST structure needs to be further simplified and rationalized: This was recommended both by 15th Finance Commission and the Revenue Neutral Rate Report.
  • New structure should have lesser number of rates (preferably 2, but at max 3).
  • National Institute of Public Finance and Policy has also recommended a three-rate framework of 8%, 15% and 30%.
• Petroleum products should be brought under GST regime. This should be followed by inclusion of real estate and electricity sector.
• To increase the attractiveness of MSME sector by large enterprises, amend the law to provide that all units buying from unregistered GST suppliers would have to pay duty on a reverse charge basis.
• Set up GST Appellate Tribunal as soon as possible as dispute resolution remains a pain point.
• Finally, GST Council’s working needs tweaking.
  • During Vajpayee regime, Yashwant Sinha established a culture of consensual decision making on indirect taxes. He did this by requiring the Empowered Committee of State Finance Ministers to be headed by a finance minister from an opposition-run-state government, such as Asim Das Gupta from WB and Sushil Modi from Bihar. This spirit can be translated in GST Council’s functioning as well.

GST on Gaming Sector

About Online Gaming Market:

• The revenue of the Indian Mobile Gaming industry is expected to exceed $1.5 billion in 2022 and is estimated to reach $5 billion in 2025.
  • It grew at a rate of 38% CAGR between 2017-20.

Details of GST Council’s decision:

• The GST council has recommended a uniform levy of 28% tax on the face value of chips purchased in the case of casinos, on the full value of bet placed with bookmaker/totalizer in the case of horse racing, and on the full value of the bets placed in case of online gaming.
• Government has now expected to bring amendment to the GST-related laws to include online gaming and horse racing in Schedule III as taxable actionable claims.

Significance:

• Increase in tax base.
• The taxation aligns with the regulation of the MeitY.
• Moral suasion to stay away from betting and online gaming addiction.
• Simplification and transparency in the gaming sector.

Criticism:

• Online gaming companies have said that this will be catastrophic for online gaming industry which have to compete with several international players.
• They also complaint that it will benefit illegal gaming platforms.
• Nowhere in the world is tax levied on the entire money that is pooled in online game. The levy of tax is always on the amount charged for the provisions of service and this can only be on the platform fee or service charge levied by any gaming company.
• Negative impact on employment in a sector which already employs more than 100,000 employees.

Example Questions:
“The last six years of the GST journey have been like the “samudra Manthan” that began with
unwanted element of transition, but slowly yielded the nectar of higher revenues” Elaborate [10
marks, 150 words]