Confusion over GST a year after it was implemented in India

Unlike Singapore's, India's Goods and Services Tax does not have one tax rate but six slabs - 5, 12, 18 and 28 per cent as well as 0.25 per cent for precious stones and 3 percent for gold.
Unlike Singapore's, India's Goods and Services Tax does not have one tax rate but six slabs - 5, 12, 18 and 28 per cent as well as 0.25 per cent for precious stones and 3 percent for gold.PHOTO: AFP

NEW DELHI - At a business meeting on Friday, Mr Hasmukh Adhia, the senior-most official in the finance ministry, faced a grilling on the Goods and Services Tax with businessmen querying a range of issues including,  delays in getting credit refunds and uncertainty about tax rates.

Organised by the Federation of Indian Chambers of Commerce & Industry (FICCI), the meeting with the Finance Secretary, who is equivalent to a permanent secretary in Singapore, was a clear indication of the confusion that still surrounds the GST a year after it was implemented in  India.

It was one of the biggest reform measures undertaken since independence.

"This interaction is very useful as we come across all kinds of problems. All this gives greater amount of clarity," Mr Adhia told the The Straits Times.

"It has been a full year of activity but very satisfying. We are starting to see the benefits," he added.

The government has insisted that the GST has, among other things, led to a seamless flow of credit from the federal to state governments, allowed a freer movement of goods since online payments meant trucks no longer had to stop at state borders to physically pay taxes and widened the tax net.

The GST, implemented in  July last year, replaced a labyrinth of 17 state and federal taxes and 33 different cess with the revenue raised to be shared between the federal and state governments.

But the Indian version, unlike Singapore's, does not have one tax rate but six slabs - 5, 12, 18 and 28 per cent as well as 0.25 per cent for precious stones and 3 percent for gold. The first four were worked out as a political compromise and the remaining two were added during reviews of the rates.

While there is unanimity that the GST is a much needed reform in India, its implementaion has been found to be wanting.

In a country that prides itself on its software engineering prowess, for instance, there have been glitches in the IT network supporting the tax.  Additionally, the six different slabs have made India's GST one of the most complicated single tax in the world with taxpayers having to file multiple returns. Delays in getting refunds have also hit exporters and small and medium scale industries which claim they are facing a working capital crunch.

Mr Amit Sancheti, who runs a leather shoe manufacturing business, is among those unhappy with the implementation of the tax.

"It's been a year but I am not getting refunds. I sell my footwear at a tax of five and buy raw material at 18 per cent. I am owed a refund of credit every month but that hasn't happened for a year," he said .

"My working capital is blocked. I have to take loans from outside. The situation is really bad," he added.

India is notorious for its bureaucratic red tape and most analysts agree that the GST ought to be simplified further.

"GST one year on is very complicated and has undergone 400 changes. The GST was marketed as one nation one tax. But that has clearly not turned out to be the case. Businesses with presence in one or more states need multiple GST numbers," said Mr Rishi Sahai, managing director of the investment bank, Cogence Advisors.

He added that the government needed to reduce the the number of tax slabs to two and simplify the system for filing returns.

The government, although agreeing that the tax needed to be rationalised, has ruled out any immediate changes. Prime Minister Narendra Modi has also ruled out a single rate, arguing that in a country like India with economic disparities milk could not be taxed at the same rate as a Mercedes Benz car. Milk is not taxed now.

The government has set up a war room to deal with all aspects of GST implementation, trained 52,000 officials about the tax process and conducted 70,000 outreach programmes across India.

Obviously, though, much more needs to be done judging by the results of a recent FICCI survey.

It showed an overwhelming number of respondents (76 percent) felt that the GST had a positive impact on their businesses and even more (86 percent) credited the government for providing clarity on various issues associated with the tax.

Yet the survey also found 96 per cent of respondents felt that improvements were required in the working of the online GST portal with 71 per cent mentioning that that they faced issues in claiming refunds. A similar number (71 per cent) felt that there was a need to reduce the GST in their sectors.

"The clear answer (to whether GST is good or bad) is that it has been wonderful, which doesn't mean there are no flaws. We need to see what we had prior to GST which was multiples taxes. We are much better than we were a year ago," said Mr M S Mani, Deloitte India Partner.

He said the first thing the government should do as a priority was to simplify the compliance process.

"In India a simple process will be followed and anything which is complicated there is a tendency not to follow."