Considering the scale and difficulty of its proposed task, the contested policy of Goods and Services Tax must be re-examined, writes Raktim Dutta
The passing of more than two years after the rollout is good time to take stock of any economic policy. So the curious case of Goods and Services Tax (GST) is perhaps worth a re-look now. The ambitious project of rationalising the entire spectrum of indirect tax in India was certainly no mean feat.
But, dark clouds are on the horizon. After the initial buoyancy in the collection, of late, there is a steady downward trend with no apparent externalities around. Cases of fake invoices, from shell firms, sprouting with disturbing regularity, indicate more than what meets the eye. It is now universally felt that many of the vices of the erstwhile tax regime that GST promised to take care of seem to be resurfacing with increased retribution.
So what had ailed Indian indirect tax system? In an economy dominated by the informal sector, multiple tax regimes with little connect amongst, had its cascading effect on the price-front for the end consumers to bear. The idea of value-added tax, (VAT) where, in a given transaction node, tax paid on purchases were made to set-off as an input tax credit (ITC) from the liability incurred on the corresponding sales, was primarily aimed to neutralise its adverse effect.
The unique facet that could transcend the previous VAT from the confines of state boundaries to a pan-Indian tax regime in GST was by effecting a paradigm shift from the erstwhile origin-based to the present destination-based taxation. This, coupled with the introduction of integrated GST (IGST), literally paved the way for input tax credit (ITC) to theoretically connect the consumption value chain right from production to consumption, cutting across multiple taxing authorities, even the federal and sub-national level, so as to ensure maximum payoff.
In hindsight, another important derivative emanated from such a connected system. It stems from the normative mindset that each transacting entity would try and lessen its tax burden. While a supplier could do that by suppressing the supply, the corresponding recipient would go for the same effect by hiking up its purchase and the resultant ITC. This contrary approach, at any given transacting node, for the same preferred outcome would guarantee market-driven checks and balance. This, otherwise, was impossibly onerous for any tax regulator to ensure, given the titanic volume of transaction that takes place and the underlying threat of evasion.
In a similar vein, any break in the chain would necessarily lead to all kinds of systemic woes. As we have seen in the earlier VAT regime, taking good advantage of a truncated system, fraudsters thrived creating numerous bogus firms by way of identity theft to play with the ITC. The resultant evasion was unmanageably high. The tax regulators were left to proverbially lament that they collected as much tax as they lost in the process.
Besides, in the GST era, use of the robust digital platform of Goods and Services Tax Network (GSTN) to capture transaction-level data beyond the retailing threshold limit was indeed a giant step towards formalising the economy. Coming as it did, in the aftermath of demonetisation, it was expected to carry a resonance effect.
However, in such a technology-intensive re-engineering process, compliance level difficulty in the early days for a vast uninitiated sector was the real challenge. But riding on commercial expediency to abandon the originally conceived GSTR-2 and 3, in favour of hastily introduced GSTR-3B, might not have been a convincing way to meet it.
It literally axed the theoretical connect in the system and invited the unwarranted administrative monitoring process back in the truncated regime. In a spate of ad
hoc measures taken to plug one hole after the other, e-waybill, roadside surveillance, etc., had to be brought back again, as conceptual baggage of the erstwhile VAT regime weighed heavily.
In retrospect, any trained eye may find that fraudsters have started resurfacing all over again in GST period after an initial spell of 'watchful' inactivity. Once again, they have seized the market with a litany of shell firms, with an eye to pass fake ITC to the beneficiaries, who could remain incognito.
Then, there are instances of carousel fraud, where refund of ITC is taken on export for which no tax was paid in the first place. So it was time to get back to the drawing board all over again.
Yet, the new return variants in ANX 1 and 2 are but simplified versions of the earlier formation that was shelved midway. Certain tightening measures are being attempted though, by emphasising on payment of tax by the supplier for the recipient to secure its ITC in the next round. But then again, the concept of blocked ITC being limited to the following recipient, for non-submission of suppliers' return would potentially leave much leeway for the manipulators to play with the system.
It is really a Himalayan challenge for the tax architect to maintain a delicate balance between ease of compliance in the new regime with that of structural security that GST, as theory, had prophesied. After all, managing evasion is always a tall call for any indirect tax system.
Raktim Dutta is Joint Commissioner, GST, West Bengal. Views expressed are strictly personal