GST’s on account of political expediency- an opinion

Granted, election season is upon us. But is that any reason to make the goods and services tax (GST) more complicated than it already is? While the rate rationalizations announced last December by the GST Council made sense, one can’t say the same about the decisions taken at the 10 January meeting, when another cess was added, states given more discretion to decide between two GST exemption limits, and the composition scheme expanded. It may be politically expedient to keep traders and informal businesses happy at election time, but the price to pay is embedding greater complexity in a scheme that is already messy.

At the January meeting, the GST Council extended the composition scheme to small service providers. On turnovers up to ₹50 lakh, the tax is 6%. The threshold limit for compulsory registration was raised from ₹20 lakh to ₹40 lakh, but states can retain the older threshold limit. Kerala, which was ravaged by devastating floods last year, was allowed to levy a cess of 1% on internal sales for two years.

In one meeting, the GST Council has added more to the complexity than in all the previous meetings put together. The assumption that once the teething troubles are over the tax will be simpler than ever is no longer true. Consider what has changed. If earlier there was a one nation, one tax rate, now Kerala will have a different tax rate for goods and services sold within the state. Would it not have been more sensible to carve out disaster-related grants from the central cess already in place instead of creating a new cess—and a bad precedent?

Consider, also, the other decision of raising the threshold for GST registration. If every state is going to decide its own threshold, this will act as a vicarious incentive for small businesses to locate on the other side of a border if the exemption limits there are higher. Ideally, the composition scheme should not be seen as a permanent fixture, for what it does is incentivize companies to remain small. This is exactly the kind of folly we encouraged earlier when we defined small units by turnover and capital and encouraged them to remain small just to obtain excise concessions and preferential tendering norms. GST is going down the same dubious path of exemptions.

These exemptions do not ultimately benefit small units, as big buyers will not want suppliers who do not offer the benefit of input tax credit set-offs. To obtain orders from large companies, small and micro units will have to underbid substantially to compete with the rest. They will also be tempted to keep turnover low by underreporting incomes. This is hardly something to cheer. A small company that keeps splitting into smaller units to remain in the composition scheme is hardly going to invest in productivity or pay proper wages to workers.

Every exemption breaks the GST supply chain and discourages the seamless flow of input tax credits. Far from really making things easier, we are privileging evasion and complexity. The benefits we are supposedly offering to the informal sector adds to their problems, as they will have to maintain multiple books of accounts to stay under the threshold in one company or in multiple companies created for the same purpose. Clearly, this trend needs to be reversed and the goal must be to steadily phase out the composition scheme. The only way to do this is by making the filing of returns easier and easier. Compliance should be a breeze.

Consider what is happening at the income tax department, where plans are afoot to give assessees pre-filled forms, with details captured from the AS-26 tax statements and other information already with the tax department. All the assessee has to do is add any missing detail and file the return as it is. Returns can then be processed in days rather than months.

This should be the stretch goal for the GST Network and the Central Board of Indirect Taxes and Customs to adopt in the coming years. In this vision, invoices, tax-paid data and other details should come filled in for the GST assessee and input tax credits should be automatically computed and accepted as correct. The ideal should be the creation of a small app that does everything from generating invoices to paying taxes and filing returns through simple clicks of the button. The goal is to reduce heartburn and toil at the assessee end, so that palliatives such as composition schemes become unnecessary.

In the short term, it would be far better for the GST Council to provide a large number of trained returns filers for free to all informal sector assessees, so that they can opt to become regular assessees rather than remain composition scheme junkies forever. The cost of providing free-filing facilities will be more than made up by higher collections and will help erase the fear of filing returns and harassment by the tax department.

GST has miles to go before it can be labelled as the “good and simple tax” that Prime Minister Narendra Modi hoped it would become. The January decisions were a leap backwards for no good reason beyond political expediency.