Mains Practice Questions

Approach

• Begin by providing a brief overview of the Goods and Services Tax (GST) regime.
• Discuss the role and importance of GST structure in improving the taxation system.
• Describe how the GST regime can be improved further on account of its shortcomings.
• You can conclude by summarizing the key factors in the GST system and its different economic prospects.

Introduction

The introduction of the Goods and Services Tax (GST) in India was heralded as a historic reform that promised to revolutionize the country's taxation structure. GST, a comprehensive indirect tax, aimed to streamline the complex and fragmented tax system that existed before its implementation.It required a constitutional amendment, which was enacted through the 101st Constitutional Amendment Act, 2016 to promote the idea of "One Nation, One Tax."

Body

The Promises and Significance of GST structure:

• Simplification and Unification: GST replaced multiple indirect taxes like excise, service tax, VAT, and others with a single, comprehensive tax. This move simplified the tax structure, making it easier for businesses to comply and reducing tax evasion.
• Promoting Ease of Doing Business: A simplified tax system was supposed to improve the ease of doing business, encourage investments, and promote economic growth.
• Digitization in Compliance: Automation of tax compliances by the government has been a massive win and has worked efficiently, especially in comparison with the erstwhile regime. This has been possible because of the introduction of a ‘one-stop-shop’ portal i.e. the GST Network (GSTN), for all compliances under GST.
• Use of Technology Tools: GSTN’s next focus was to leverage technology and data available to improve compliance, detect frauds and support policymaking and to this end, GSTN formed a Business Intelligence and Fraud Analytics (BIFA) unit.
• Cooperative Federalism: The GST Council is a true testament to the fiscal federal and consensus-based structure, which is a cornerstone of the GST regime. The central and state governments have been working together on critical legal issues.
• Enlargement of the Tax Base: In general, GST has reduced the overall indirect tax burden on consumers and made Indian products more competitive in international markets. There has been a phenomenal enlargement of the tax base, resulting in increased revenue collection.
• GST Eliminates the Cascading Effect of Tax: GST is a comprehensive indirect tax that was designed to bring indirect taxation under one umbrella. More importantly, it is going to eliminate the cascading effect of tax that was evident earlier. Cascading tax effects can be best described as ‘Tax on Tax’.

Challenges and Glitches in GST Implementation:

• Multiple Tax Slabs: One of the most significant challenges in the GST regime is the presence of multiple tax slabs. GST has five tax slabs - 0%, 5%, 12%, 18%, and 28%.
  • This multiplicity has made the system complex and led to classification disputes, as products and services need to be categorized under one of these slabs. Moreover, it results in confusion and compliance issues for businesses.
• Compliance Burden: GST compliance involves filing multiple returns and adhering to various rules and regulations.
  • For small and medium-sized enterprises (SMEs), this has increased the compliance burden, making it challenging for them to adapt to the new tax system. The need for regular filing and the digital interface often cause difficulties for smaller businesses.
• Technology Issues: The GST Network (GSTN), the IT backbone of the GST system, has faced technical glitches and server downtimes, affecting taxpayers' ability to file returns and comply with the law. This not only results in delays but also adds to the frustration of businesses.
• Input Tax Credit (ITC) Mismatch: The ITC mechanism, which allows businesses to set off taxes paid on inputs against their output liability, has faced issues with reconciliation. Mismatches in ITC claims have led to disputes between businesses and the tax authorities, creating a burden on businesses.
• Evasion and Fraud: GST was expected to reduce tax evasion, but it has not been entirely successful in doing so. Some businesses still engage in tax fraud and evasion, taking advantage of the complexity of the system and exploiting loopholes.
• Anti-Profiteering Measures: The introduction of anti-profiteering measures aimed to ensure that businesses pass on the benefits of reduced tax rates to consumers. However, the implementation of these measures has faced criticism for being cumbersome and leading to disputes.
• Interstate Transaction Issues: Businesses involved in interstate transactions have reported complexities in dealing with multiple state tax authorities and compliance requirements. The issue of dual control between the central and state tax authorities further complicates the matter.
• Impact on the Informal Sector: The informal sector, which constitutes a significant portion of India's economy, has been adversely affected by the formalization brought about by GST. Many small businesses in this sector have struggled to adapt to the new tax system.

Conclusion

The introduction of the Goods and Services Tax in India was undoubtedly a significant milestone in tax reform. However, its effectiveness has been marred by several glitches and challenges, including multiple tax slabs, compliance burden, technology issues, and tax evasion. Despite these issues, GST represents a transformative change in India's taxation structure and has the potential to drive economic growth and simplify the tax regime further. Addressing these challenges and fostering a culture of tax compliance will be essential for the continued success of GST in India.