The Confederation of Indian Industry (CII) has recently come out with a package of recommendations for stimulating the Indian economy and boosting the economic growth rate of the country. The suggestions include a number of measures, both short term and long term that cover a wide number of sectors and address a number of current issues and challenges. An important area of recommendations is implementation of the Goods and Services Tax.
The historic Goods and Services Tax (GST) was implemented on 1st of July, 2017 with a view to create a common national market by amalgamating a large number of central and state taxes into a single tax regime. Initial stages of its introduction have invariably produced technical as well as administrative issues.
Input Tax Credit (ITC) is the mainstay of the GST tax regime. One of the fundamental features of the GST reform is the seamless flow of input tax credit across the chain and elimination of the cascading effects of multiple taxes. The availability of ITC is expected to boost exports and manufacturing activity and eventually lead to increase in GDP. However, there is a need to define and institute a clear and simple framework for claiming ITC.
Further, the scope of GST excludes a number of large sectors including electricity, oil & gas, real estate, tobacco and alcohol and therefore leaves no case for claiming ITC for businesses in these sectors. Thus, it is suggested that the coverage of GST should be expanded to include these sectors at the earliest.
There is absence of clarity regarding tax set-off for the North East and Special category states, an incentive which was provided in the pre-GST regime to encourage investments. An announcement regarding continuation of such incentives is required, especially for investors who have already ploughed in funds into these under-served regions based on tax exemptions available earlier.
With the implementation of GST, the C-Form system stands eliminated. As a result, project developers are required to pay taxes on products that are not part of the GST and cannot be refunded under ITC. Their sustainability stands impacted with low returns on account of higher tax outgo. Thus, a major recommendation in the area of GST implementation is the allowance of C-Form set-off for the exempted products, which would allow businesses to claim their refund.
Delays in the GST refunds is one major issue faced by exporters. Thus, quick refund of IGST paid on exports is recommended. Another suggestion is to exempt the exporters from making advance payments before the receipt of goods, for payment of GST.
Additionally, exporters in the sectors excluded from the ambit of GST are no longer able to claim tax refunds under the duty drawback scheme. This has escalated the price of exports, making them less competitive, particularly the apparel sector. Government may consider compensation with the duty drawback benefits to keep exports competitive.
The need for expediting the creation of a mechanism for refund of inverted tax is felt (tax on inputs greater than tax on output) in sectors like pharma, tractors etc. which are affected due to delays in refund of inverted tax incidence.
Further, there is need to re-examine the provision of the reverse charge under GST. A reverse charge typically applies when an enterprise not registered under GST supplies goods to a registered enterprise. In this case, the registered entity needs to pay the GST under reverse charge and the burden of the tax is passed on to the registered enterprise. This discourages large enterprises to deal with smaller, unregistered enterprises. Therefore, incentives must be created for the smaller enterprises to encourage them to register.
Presently, an efficient redressal mechanism system in matters relating to GST is absent. In this context, appointment of a senior officer as the nodal officer in the Ministry of Finance could help in guidance and redressal of grievances in matters relating to GST.
Finally, high compliance burden faced by the MSME and the services sectors is a cause of concern. Processes need to be simplified for which improved digital infrastructure is critical. High speed broadband is essential, especially in the remote areas for better and improved connectivity.
This would help bring about greater certainty in the system, along with easing GST implementation.