Patching-up the leak
Mounting Goods and Service Tax evasion is a financial chokehold on the Centre and States and must promptly be addressed by the GST Council
It took over 10 years for the Government to enact a law to introduce goods and services tax (GST), since it was first conceived, to replace the cumbersome indirect tax system. The genesis of the introduction of GST in the country was laid down on February 28, 2006. Unfortunately, it seems that the government's taxation experts and bureaucrats still managed in their own way to keep the system complicated, resulting in unsatisfactory tax compliance. The GST regime may not have failed but few will agree that it is producing the desired result. The country's GST collection is well below its potential, impacting the revenues of both the states and the Centre. Even the International Monetary Fund feels India's GST system is a rather showy under-performer. Tax evasion, inflated input tax credit claims as well as devising means to show revenues below the threshold limit are commonplace. This is a matter of great concern for the central and the state governments. States are dependent on the Centre for over 50 per cent of tax collection. Indirect tax is a major revenue source of the Central Government. Several states are now claiming that the Centre has not compensated them for loss of revenue from GST. Central grants are held back. So are the states' share of central taxes.
It is high time that the all-powerful GST Council, chaired by the Finance Minister, takes another look at the situation to ensure that the system works perfectly as in other countries. The GST Council is a joint forum of the Centre and states. Its decision is final. Other members of the council consist of the Union Minister of State for Revenue and state finance or revenue ministers. The council is supposed to make recommendations to the Union and the states on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws, principles that govern place of supply, threshold limits, GST rates including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain states, etc. The secretariat is manned by officers taken on deputation from both the central and state governments. However, the secretariat is yet to act as per expectation to make the GST system truly effective and produce results to improve compliance.
According to an IMF analysis, multiple rates, exemptions and implementation challenges are affecting goods and services tax (GST) collections in India. The study of India's resource mobilisation for the next five years has estimated that in 2018-19, GST collections were 5.8 per cent of GDP. Though this was better than some of the comparable developing countries, it remains far below the potential 8.2 per cent of GDP, indicating that the efficiency gains from the new regime have not fully accrued. In a way, this means that the present rate GST collection is about 40 per cent below its potential. That is a huge uncovered amount, over Rs 5,00,000 crore per year. There are several design flaws. They include multiple rates, as opposed to one or two rates in most countries and the threshold for businesses to be included in the GST net. Some of the issues have created economic distortions, including refund problems. Currently, there are four slabs: 5 per cent, 12 per cent, 18 per cent and 28 per cent. Also, there are other rates for bullion and real estate apart from cess on luxury and sin goods such as cars, tobacco and soft drinks adding to the complexity.
The lower GST collection and delays in GST transfers by the Centre has highly upset some of the state governments such as Punjab, Odisha, Telangana and West Bengal. The choking of their financial pipeline from the Centre has put especially non-BJP run states in a mess. Recently Punjab Finance Minister Manpreet Singh Badal came down heavily on the Centre on the issue. "It is demeaning and embarrassing…… We signed away our financial sovereignty but are now being denied the compensation promised to us. We are staggering salaries and borrowing from state PSUs to clear the dues." fumed Badal. States were guaranteed by law to be paid for any loss of revenue in the first five years of GST implementation. However, several states claim that the Centre has not paid them for months.
Last week, West Bengal Chief Minister Mamata Banerjee wrote to the prime minister expressing deep concern over inordinate delay in releasing Rs 50,000 crore that is due to the state from the Centre under central grants, the share of central taxes and GST compensation. The Union Government has been under financial stress as well due to below-par GST collection. Recently, Junior Central Finance Minister Anurag Thakur told Lok Sabha that the GST compensation due to states would soon be cleared in two instalments. His response came after MPs from Telangana and Odisha complained that their states were not getting the GST share and Integrated Goods and Service Tax (IGST). Thakur informed Parliament that the Government has detected GST evasion to the extent of Rs 38,896 crore during April-October 2018. The official statement asserts that GST evasion is clearly rising under the nose of the government's tax department.
Recently, the Patiala House Court denied bail to two businessmen after they were found guilty of opening bogus companies in the name of dummy proprietors issued through fake invoices from these companies worth crores of rupees with no actual supply of goods just to enable the recipients of the invoices to claim the input tax credit. Fake claims of input tax credit have also been commonplace for tax evasion. Many feel that multiple, high levels of GST rates are the key reasons behind such tax evasion. One way that the GST Council can combat the propensity to evade tax and make false claims is to reorganise the system so that India becomes a low-tax-rate, high-tax-compliance nation inducing taxpayers to be honest.
Views expressed are strictly personal
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