#OneYearOfGST: These Were The Hits And Misses

Ever since the Goods and Services Tax or GST came into force on July 1, it has invited a lot of debates. Although the industry experts have been discussing the need for GST, its viability and the loopholes, the sector at large has hailed the move. However, the stakeholders, for a long time, tried to understand the best way to align their businesses to comply with the new tax regime. In the last one year, what did GST achieve and what did it miss out on? Here’s a look:

The hits

1) According to a Deloitte India survey, 77 per cent of chief finance officers think that GST had a favourable impact on the economy. Another 57 per cent said they are now willing to take risks in their business as the future would be about making gains owing to this reform.

2) The set up of National Anti-Profiteering Authority also speaks volumes about the way that the government believes that prices may drop, reasonably if the glitches are addressed periodically.

3) The Economic Survey 2017-18 noted that 9.8 million new businesses registered themselves under GST. This goes on to show that the authorities have been able to push the cause of one nation, one tax and streamline the process in a short span of time.

4) Within real estate, too, the benefits have been noticed. For example, under the old tax laws, VAT and Service tax charged by different Contractors and excise duty, entry tax, octroi was paid on the procurements. GST law has increased the margin in the hands of contractor/developer by removing all the above-mentioned taxes.

5) Perhaps mid-segment and luxury housing may not have benefited much but GST has provided some cushion to under construction projects and marginally brought down prices for affordable housing owing to the input tax credits.

6) For those eligible for a credit-linked subsidy scheme (CLSS) , not only will they be entitled to interest subsidy under the scheme but also the concessional rate of 8 per cent that the GST Council decided to extend to the affordable housing sector early this year which is a win-win.

7) While the impact of GST is muted for ongoing projects, experts believe that with businesses becoming more optimistic about the market scenario, real estate may indirectly benefit.

The misses

1) British brokerage HSBC has said that GST has failed to formalise the economy, that which it had set out to do. The company’s report stated, “But so far, in our view, it has not been able to live up to that promise. nor has it brought down the demand for cash which has in fact only gone up.”

2) An overall review of products that are out of the GST net is required. Items like electricity, petroleum or even those that come up due to GST such as input tax credit must also be looked at because it may run the risk of tax inversion.

3) The GST Law Review Committee has itself pointed out 180 issues that would be taken up by the GST Council. One of the issues pointed out was to do away with the precondition that returns should match with claims in order to avail Input Tax Credit.

4) The World Bank has pointed out that India’s GST system is globally speaking, the toughest with not just the highest tax slabs but also the country with most number of tax slabs. India is among the five countries (Italy, Luxembourg, Pakistan and Ghana) that have 4 tax slabs as against 49 countries that have just one and another 28 countries that have two slabs.

5) The World Bank has also noted that administrative tax compliances may have gone up and the burden might fall on firms given that tax refund process is slow. Multiple taxes are also a cause of high compliance cost.

6) The rate of GST on construction materials is very high at 28 per cent and has cost the real estate industry as a whole and not just that even homebuyers. The good news is that the council may review and put it in the 18 per cent slab. Industry experts suggest that cement and paints should move to the 18 per cent slab.

7) The new threshold is also a matter of concern. Businesses that have an annual sales of Rs 1.5 crore annually fall under the GST net and are eligible to deduct input tax credit. The number was revised from Rs 75 lakh annually. At present, this fiscal threshold is among the highest in 31 comparator countries.

8) GST Rules suggest that every person or business firm that is liable to take GST registration will have to register for GST separately for each of the states in India where he/she has a business operation and/or where he/she conducts commercial activities as per GST registration rules. However, this has made GST filing very complex and the Council is yet to propose some relief. One of the considerations could be a single GST registration number.

9) Fake invoices may have been generated, says Central Board of Indirect taxes and Customs member John Joseph, in order to show goods that were never supplied. This has led to some claiming input tax credit when in reality they are not eligible. It was noted that over Rs 2,000 crore is the loss in revenue that the government may have lost owing to this.

10) Not just fake invoices, only one per cent of over 1.11 crore resgistered businesses pay 80 per cent of GST of taxes. This is a serious concern given that GST may have failed to check into frauds.

11) Realtors across the country may have hailed the push towards transparency but there has been a unanimous debate about the taxation front. Property prices have not sobered which was one of the top concerns of prospective homebuyers and eagerly anticipated. Similarly, stamp duty and registration fees are very much existent which thwarts the cause. Again, there is no mechanism to offset the increase in costs against benefits of ITC. A common rate would be much more helpful, agrees the industry body. Realtors are also doubtful of the abatement available for land cost to calculate service tax on under-construction projects. The industry as a whole still lacks clarity, a loophole that the GST Council must consider and address.

Elsewhere

But how did this tax reform fare in other countries? Here's a look:

VAT/GST Rates
Advanced Economies	Implementation Year	Initial Rate
Australia	2000	10
Canada	1991	7
France	1954	20
Germany	1968	11
Italy	1973	12
Japan	1989	3
Korea (South)	1977	10
United Kingdom	1973	8
Emerging Economies
China	1994	17
India	2017 (GST)	15
Mexico	1980	10
Russia	1991	28
Saudi Arabia	2018	5
Turkey	1985	10

Source: OECD and RBI

Here are some fast facts:

*There are about 160 countries in the world that have some form of Value Added Tax (VAT) and GST. It becomes important to note that GST rates in the Organisation for Economic Co-operation and Development (OECD) countries is higher than it is in India and other emerging markets. For instance, in Canada, Japan, South Korea, Malaysia, Philippines, South Africa, Switzerland, Thailand, etc, the GST rates are in the range of 5-14 per cent while countries like Argentina, France, Italy and United Kingdom have higher GST rates varying between 20 and 22 per cent.

*Singapore taxes most goods and services uniformly while France and UK, just like India, have multiple rates for various goods. In fact, Singapore witnessed major inflation after the implementation of GST. In 1994, when it was first imposed, it was at three per cent and the government made clear that it would not hike the rates for next five years which meant people could spend without fear. According to the data available, Singapore still boasts the least GST rate and trade is not compromised either. Do note that Singapore has a GST compensation scheme for the disadvantaged segment of the society.

*Canada reeked under inflation post the introduction of GST which replaced the manufacturer's sales tax. Thereafter, the Canadian government decided to reduce rates, from seven per cent to six per cent in 2006 and five per cent in 2008. Soon, provinces were able to have their own sales tax in place.

*UK escaped inflation because some believe that VAT had replaced a concealed consumption tax, hence, the impact was not felt.

*In Malaysia, the Ministry of Domestic Trade and Consumer Affairs had to moderate the situation by mitigating the risk of price rise.

*In Australia and New Zealand, inflation was normalised within a year. Data suggest that in Australia, the impact of GST was felt after a quarter and it was sharp though fleeting. There was a spike in domestic consumption before the implementation of GST as consumers started hoarding before the new tax could impact their spend capacity. This led to a slowdown in economic activity soon after. Within a year, normalcy returned. In New Zealand, GST was initially introduced at 10 per cent and was raised to 12.5 per cent and by 2010, it was 15 per cent. It is now following GST at a single rate with no exemptions. The country now boasts one of the highest GST revenue grosser among OECD countries.

*If the experiences of the British and the Germans are to be noted, the introduction of such a reform works the best when the economy is slow. Any inflationary trend would thus, be controlled.

Also read: If Real Estate Brought Under GST, Buyers Will Pay Negligible Tax: Jaitley