Challenges in GST Implementation 

Context: Former Chief Economic Adviser Arvind Subramanian emphasises the need for simplification of GST structure and rate rationalisation under the current system.

Features of GST

• Goods and Services Tax (GST) is a single tax levied on the supply of goods and services across all stages of the supply chain (right from the manufacturer to the consumer). 

GST subsumes multiple state and central taxes: 

• Excise duty 
• Service tax 
• Additional excise duty 
• Additional Customs duty 
• States sales tax 
• Entertainment tax
• Octroi tax (Entry tax)

• GST has Dual Tax Structure: 
  • CGST (Central GST) goes to the Central Government.
  • SGST (State GST) goes to the state government, in which the sale is taking place.
• GST is a destination based tax. During interstate trade, tax is imposed by the state (importing state) in which the consumption takes place instead of the state which supplied the goods/service. 

Current Challenges in GST Implementation: 

1. Too many Tax Rates: 

• There are four primary tax rates (5%, 12%, 18%, and 28%) under GST. Besides this,  there are special rates (0%, 0.25%, 1%, and 3%). Additionally, there are more than 50 different cess rates ranging from 1% to 25% that complicate the tax structure. 
• Issue: When there are multiple tax rates then there exists a risk of misclassification, as taxpayers try to classify their products or services under lower tax brackets, whereas tax authorities would try to classify them under higher tax brackets. 
• Solution: Lower number of tax brackets/rates will reduce possibilities of such classification disputes and also increase tax compliance.

2. Revenue Neutral Rate:

• The revenue-neutral rate (RNR) is the tax rate at which the GST system would generate the same revenue as the pre-GST indirect tax regime. The Aravind Subramanian Committee had recommended an RNR of 15%–15.5%. This was to ensure that the income to the states and the Centre is not eroded in absence of pre-GST taxes. 
• Issue: India’s GST Council has over the years reduced several tax rates, resulting in the lowering of the average GST rate to around 12% percent from recommended ideal RNR. This has hurt the revenue collections for both the Centre and states.

3. Inverted Duty Structure: 

• Inverted duty structure refers to a situation where the GST rate paid on inputs received, is more than the GST rate of tax on output supplies.
• Issue: Persistence of inverted duty structure in sectors (like textiles) has resulted in accumulation of unutilised input tax credit. Such unutilised tax credit has to be carried over to the next financial year, until it can be adjusted against future taxes. This is eroding the working capitals for many small firms.
• Solution: Correcting the inverted duty structure will lead to a reduction in the requirement of tax refunds.

4. Issues with Exemptions: 

• Issue: When a good/service is exempted from GST, only the final output is exempted from the tax but the input taxes paid in the process of manufacturing the goods are not refunded. 
• Solution: Zero rating can be more transparent than exemption, as the taxes paid on inputs and the resulting tax liability can be easily tracked and verified. This can help to reduce the risk of tax evasion and increase the overall effectiveness of the tax system.

5. Rising pendency due to delay in establishment of Tribunals:

• GST Tribunals are envisioned as specialised bodies to handle disputes related to GST, providing a timely and efficient resolution mechanism. 
• Issue: Several legal, administrative and constitutional challenges have contributed to the delay in their establishment. Aggrieved taxpayers have to approach the High Court through writ, post receipt of an order from an Appellate Authority. Due to the pending backlog, High Courts are unable to dispose of the matters expeditiously.