The government initiative to engage in public consultations on the business processes for Goods and Services Tax (GST) compliance (registration, payments, refunds and returns) is a welcome opportunity for the industry to share its views. Thanks to the decisive intervention of the new revenue secretary, Hasmukh Adhia, this is the first time that the Empowered Committee of State Ministers has responded to the industry’s long-standing demand that it be involved in the design and drafting of the GST law and procedures so that the legislative framework duly takes into account the practical aspects of business. A transparent, consultative process is the cornerstone of successful reform, especially so when the reform is of the magnitude that the GST will be.
The GST processes have many positive features. They offer a nearly paperless and transparent compliance system, managed by Goods and Services Tax Network, an independent service provider. The processes will be fully harmonised across the country, supported by a world-class information technology system and human interface will be reduced to a minimum.
Another distinguishing feature of this system will be the automated cross-verification of invoices between sellers and buyers claiming input tax credits. Fraudulent input credit claims would be difficult under the system. The electronic record of purchases and sales and use of PAN-based registration number will also help match information with that reported for income tax purposes.
However, the processes, as currently drafted, appear one-sided. They protect the interests of governments, but give short shrift to the interests of honest taxpayers. The requirement of separate registration of dealers in each state where they conduct business, no refund of input tax credit for inventory build-up and capital goods and the requirement of discretionary approval of tax credit refunds for exports are some examples that smack of the legacy system to which governments remain wedded. These would compound the complexity of the GST and further dilute its economic benefits, whatever little is left of them after the design compromises imposed under the Constitution 122nd Amendment Bill.
Take the requirement of separate registration of dealers in each state where they conduct business. This is neither necessary nor would it serve any meaningful purpose. For GST determination all that is required is a state-wise segregation and tracking of sales and purchases, which could then all be reported on a single tax return of a taxpayer, filed under a single registration number. This information could then be sent to the relevant states and the Centre for auditing and enforcement purposes. Instead, the states are asking that taxpayers have a separate registration number for each state and file a separate tax return for each registration number.
For all practical purposes, each taxpayer would be cut up into multiple entities (potentially 36), equal to the number of state registrations. No pooling would be allowed of negative and positive tax balances, credits, payments and refund entitlements under different registration numbers of the same legal entity. Amounts owed under one registration number would be subject to interest and penalty even if the taxpayer is entitled to credits/refunds under another registration number. Such wasteful multiple reporting/filing requirements would not be conducive to improving India’s ranking for ease of doing business.
This system would require firms to develop a state-wise accounting system for tax purposes. Even where such accounts are already maintained by the firms, they may not be for each state, and could be grouped for geographical regions (for example, circles for telecom operators), the boundaries of which need not be contiguous with those of the states. If all that is required for the GST is a state-wise tracking of sales and purchases, why impose the burden of splitting all other incomes and expenditures by state?
The second major drawback of the proposed GST process is the reluctance of the authorities to grant prompt and automatic refund of excess input tax credits (ITC). Under the GST, excess ITCs may arise for exporters who collect no tax on export turnover, new/start-up businesses which make substantial capital outlays before commencement of production or seasonal businesses for build-up of inventory. Most advanced jurisdictions design their GST processes so that input taxes do not compound the funding requirements for new projects or expansions. For example, payment of taxes on imports is deferred by a few days to coincide with the time of filing of tax returns when the tax can be claimed as input credit, resulting in no net tax outflow. Small and medium-sized enterprises (SME) are allowed quarterly filing of tax returns, which provides them an interest-free tax float, reducing their working capital requirements.
The processes recommended by the joint committees for India are the opposite. First, they propose that no refund be allowed of excess ITC for purchase of inventory and capital goods. Such an amount can only be carried forward to future tax periods. The segmentation of such credits from the rest would not be simple and likely beyond the capacity of most entrepreneurs. Second, even where refunds are to be allowed (for example, exports), they would not be automatic, but require explicit approval of each of the respective authorities, who would have up to 90 days to grant the same. What is the need for manual approval, once the credit claims are already verified through automated cross matching? Third, if the refund is unduly delayed, the taxpayer would be entitled to a measly interest of six per cent, and that also only when the refund is eventually processed. Contrast this with the interest on overdue taxes, which could be 18 per cent or more.
Whatever the rationale, the proposed system does not provide much comfort to businesses that their legitimate GST refunds would be granted without hassles and delays. The businesses worst affected by these inefficiencies would be the start-ups, those undertaking major expansions, and the SME sector perennially short of working capital.
To fully harness the benefits of modern technology for the GST, the legacy system needs to be discarded. As counselled by Albert Einstein, “We cannot solve problems with the same thinking we used when we created them.”