Can GST prove to be a good and simple tax in the times of Covid-19 pandemic

first_imgInternational monetary fund (IMF) in its latest forecast in April,2020 has stated that the global economy would be facing a tougher time than it had seen during the Great Depression of 1930s. It has projected a growth rate of 1.9 percent for India in 2020, lowest ever since the liberalisation and economic reforms in1991. This indicates the gravity of the present economic situation caused due to the Covid-19 pandemic.The economic cost for India is going to be huge particularly in the context of the complete lockdown imposed in the country. The businesses took a huge hit, there is a massive disruption of supply chains, consumer spending has crashed. The economy is reeling under severe demand and supply shocks. According to the estimates of FICCI (Federation of Indian Chambers of Commerce and Industry), nearly 40 million jobs are at risk. Recovery from this crisis would be a herculean task for the business and trade. In the path to recovery, besides other aspects, one of the most vital aspects which would be crucial to economic recovery is the level of tax compliance burden on the trade and industry.In this context, it is of utmost significance and relevance as to how government would proceed to deal with the slowdown particularly with respect to GST (goods and service tax) in coming days and its impact on the industry which is already grappling with serious losses. There have been representations to the government from several trade bodies and associations seeking either complete waiver of GST for certain period or reduction in tax rates.The government has announced a slew of measures to provide relief to the taxpayers to combat the Covid-19 economic crisis. Few of them being extension of compliance dates for filing GST returns and also extension of date for payment under Sabka Vishwas  scheme (legacy tax dispute resolution scheme). Further, reduction or waiver of interest and late fees for delayed filing of returns for different categories of taxpayers based on their turnover was announced. Similarly, certain amendments were made to recently introduced Rule 36(4) of CGST Rules, 2017 which now allows the taxpayers to have hassle-free availment of Input Tax Credit (ITC) based on their book of accounts from February2020 to August 2020 and account for it later in a consolidated manner in September 2020.However, considering the fact that there is a great degree of decline in consumption coupled with working capital issues and liquidity crisis for the businesses, the government needs to take a relook at many of the plans and provisions of GST. Certain bold decisions are warranted by the government to address the concerns of the industry and provide tax relief but at the same time, it is highly imperative that tax collections cannot remain subdued.During the Budget 2020 speech, Union Finance Minister has stated that GST rate structure is being deliberated so as to address issues like inverted duty structure (IDS). Inverted duty structure refers to a situation where rate tax on inputs is higher than the rate of tax on output supplies. This anomaly in rate structure was sought to be corrected by the government for several reasons. One of them is that the government is shelling out nearly 20,000 crore rupees as refund annually on account of accumulated ITC due to inverted duty structure. In addition to this, even from the taxpayers’ point of view, huge amount of working capital is getting blocked till the time the entire process of getting refund is completed.To pursue the agenda of correcting the inverted duty structure, the government has begun with the increase of the tax rate of mobile phones from 12 percent to 18 percent in the recently concluded 39th GST council meeting. As stated in the budget, rejig of the IDS is being contemplated by the government for other commodities. The sectors having IDS includes fertilisers and chemicals, footwear, fabric, manmade yarn, APIs (Active pharmaceutical ingredients) in pharmaceutical sector and nearly dozen other items.However, this move of increasing the tax rate on mobile phones by the government did not go down well with the smartphone industry. Indian Cellular and Electronics Association (ICEA) has expressed concerns that due to the Covid-19 crisis, there are supply shortages from China and the rupee has weakened against dollar. In this scenario, any increase in tax rate would jack up the prices and it would seriously hurt the industry. Instead, the ICEA has proposed the reduction of tax rate of input components from 18 percent to 12 percent to correct the IDS.This leads to the larger issue of how the government would proceed to deal with its stated objective of correcting the IDS of other items particularly in this situation where businesses are struggling to stay afloat. It is going to be a tough walk for the government because on one hand it cannot afford to increase the tax rates of finished goods to address the IDS issue as it would lead to increase in the prices and consequent fall in the demand. On the other hand, it is not an easy task to reduce the tax rate on inputs because it would make a dent in the tax revenue of the government. Moreover, the tax rate of many of the goods suffering IDS like fertilisers, footwear, fabric etc is in the tax slab of 5 percent which makes it difficult to bring down the input tax rate for these items to the same level.Besides, the GST collection for the month of March 2020 is 97,597 crores against a target of 1.25 lakh crores. This is the lowest in the last 5 months and this trend is expected to follow for quite some time in coming months. Hence, in these circumstances, addressing the issue of IDS may not be a cakewalk for the government.The Economic survey 2019-20 made a case for correction of IDS by reducing the tariff rates in respect of intermediate inputs and raw material. Given the present situation of the trade and industry, it may not be prudent to increase the tax rates of output or finished products. So, the possible step to correct the IDS now is by reducing the tax rate on inputs for certain sectors selectively. These sectors should be chosen based on their impact on agroeconomy, the job intensiveness, their competitiveness in the global market and the ability to contribute to address the present health crisis. For instance, in pharmaceutical sector, the tax rate on APIs (Active pharmaceutical ingredients) is at 18 percent and whereas for most of the drugs, the tax rate is 12 percent. In view of the Covid-19 pandemic being rampant, it would be a step in the right direction by reducing the tax rate on APIs.Similarly, in respect of textile industry, synthetic fibre and yarn are taxed at 18 percent and 12 percent respectively but the tax on output is 5 percent. This distortion needs to be addressed to free the working capital that is getting blocked and this would address the liquidity issues of the industry. The textile and clothing industry is a labour intensive sector which employs more than 105 million people and contributes substantially to GST revenue. On the same lines, fertiliser industry which would have a bearing on the agriculture sector also has inverted duty structure. Inputs like ammonia, sulphur and phosphoric acid are taxed at 18 percent but the tax rate for the output is 5 percent. The government needs to address the issue of IDS by revising the tax rates of inputs atleast in certain key sectors whose survival and growth is important for saving lives and livelihoods. At the same time, this would also help the government in saving huge amount of expenditure which at present is being disbursed in the form of refunds.According to the industry body FICCI, the most severely impacted industries are hospitality, tourism and aviation. Besides these, other sectors like automobile, metals and particularly many MSMEs are also badly affected with demand slump and liquidity crunch. Another industry body, Federation of Associations in Indian Tourism and Hospitality (FAITH) says that nearly 38 million jobs in these sectors are at risk. As far as GST is concerned, the government needs to prioritize these sectors either in terms of cuts in tax rate, waiver of GST for limited period or may be by easing of certain rules and provisions of GST Act. ASSOCHAM (Associated chambers of commerce of India) has asked the government to consider the reduction of GST by 50 percent across the board for coming three months and by 25 percent in this fiscal.To tide over the negative impact of the pandemic, the government needs to support the industries with some tax relief measures. Automobile sector which contributes around 7 percent of the GDP accounts for nearly 15 percent of the GST collection. A temporary reduction in the GST rate till certain stability is achieved would be necessary to revive the automobile sector. Similar tax relief measures are the need of the hour even in the hospitality and aviation sector which are the worst affected sectors leading them to the verge of bankruptcy. The request of the Confederation of Indian industry (CII) to the government for bringing the aviation turbine fuel under the ambit of GST which would enable the availment of full ITC can be considered. With many businesses especially hospitality sector witnessing mass cancellations, the government has recently allowed to claim a refund of GST in cases where invoice was generated but was subsequently cancelled.Further, the government needs to ease certain rules and provisions of GST atleast temporarily to help the trade and industry overcome this crisis. According to the existing provisions of GST Act, refund of ITC accumulated on account of input services, capital goods in inverted duty structure category is not allowed. Similarly, refund of ITC availed on capital goods for zero rated supplies is not allowed at present. To begin with, removal of this restriction would help businesses, infuse liquidity into the market and in a way provides fiscal stimulus to the economy. Relaxation in norms of claiming ITC especially wherever it is restricted should be considered. For instance, restaurants in certain hotels having room tariff less than 7,500 rupees is not allowed to claim ITC at present. Allowing the availment of ITC in these types of cases can be examined by the government to help the industry.At present the composition scheme of GST is restricted to only few categories of taxpayers like manufacturers, traders and restaurants. This can be extended for several other categories which would reduce tax compliance burden on small taxpayers. In addition, at present the threshold limit for taking GST registration is an annual turnover above 20 lakh rupees for services and above 40 lakh rupees for supply of goods. However, this threshold limit of 40 lakhs can be extended to service sector as well which would benefit small service providers.Covid-19 pandemic has thrown an unprecedented challenge to both government and businesses. The government needs to take proactive steps to implement the tax relief measures on a war footing. An empowered group headed by Economic Affairs secretary was constituted by the government to suggest a roadmap to revive the economy. Hopefully, the empowered group would come up with innovative measures to reduce the tax compliance burden to the extent possible. As the United Nations Secretary-General Antonio Guteress has said “Exceptional times demand exceptional solidarity. The magnitude of the response must match the scale of the crisis”. It is expected that government would definitely respond to address the crisis and prove once again that GST is indeed a good and simple tax.last_img

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