The introduction of the GST system has significantly influenced the country’s indirect tax framework. While GST is implemented with the aim of enhancing the overall tax system, there remain certain areas that require attention to ensure a positive, long-term impact. The implementation of GST registration is intended to simplify the nation’s indirect tax structure by consolidating various central and state taxes. Despite being recognised for its manifold benefits, there are also many problems of implementation of GST. If the challenges in implementing GST are not effectively addressed, there is a potential for lasting repercussions on our economy due to this tax reform.
Advantages of Goods and Services Tax
The advantages that result from the successful implementation of Goods and Services Tax or GST are substantial. This tax reform plays a crucial role in integrating India’s informal sector, fostering increased exports, cutting down business costs across various sectors, and mitigating instances of redundant double taxation. However, it is imperative to acknowledge certain challenges associated with the execution of this tax system. These challenges encompass the ambiguity surrounding the anti-profiteering clause, complications related to input tax credit, and uncertainties concerning the functionality of the GST information technology system. Addressing these issues is vital to ensure the success of this promising policy initiative.
Problems of Implementation of GST
The successful implementation of the Goods and Services Tax also faces significant problems of implementation of the GST, primarily revolving around the documentation requirements for Input Tax Credits and the stage at which these credits accumulate. The fundamental objective of any value-added tax system, such as GST, is to prevent double taxation by providing credits at each stage of the production chain, taxing only the added value.
One of the major problems of implementation of GST pertains to the burdensome documentation requirements, potentially leading to inadvertent consequences. According to Section 16 (11) of the Model GST Law, an entity can only receive input tax credit when certain conditions are met, including the receipt of a tax invoice from the supplier, receipt of goods/services, payment of taxes by the supplier, and the filing of GST returns. However, this places the administrative burden on the buyer rather than the supplier, posing challenges for businesses.
In such cases, the buyer may be required to pay not only their share of the tax but also the supplier’s share. Additionally, discrepancies in the supplier’s documentation may emerge later, leading the buyer to repay the tax reimbursement to the government with interest. Although market forces may address non-compliance, the government has introduced a publicly accessible compliance rating system to help consumers identify defaulters.
One of the more immediate problems of implementation of GST is the cash flow issues resulting from Section 16 (11). Businesses typically aim for efficient working capital to invest in expansion or interest-bearing savings accounts. As input tax credit is released only after the supplier submits appropriate documentation, businesses must account for potential delays, reducing available cash for growth and investment.
Moreover, any interstate inventory relocation is considered a taxable event under GST. Taxes are charged at the time of transfer, and compensating input tax credit is available only at the point of sale, putting additional strain on businesses’ cash requirements. Small businesses, in particular, may face cash flow strains, possibly resorting to borrowing money for daily activities or, worse, ceasing operations. These problems of implementation of GST highlight the need for careful consideration and potential reforms to ensure the smooth functioning of the GST system in India.
Problems of Implementation of GST: GSTN Functionality
An essential aspect contributing to the problems of implementation of GST revolves around the functionality of the Goods and Services Tax Network, the suggested technology backbone of the GST system. The effectiveness of this IT infrastructure is crucial for tracking and implementing the evolving tax system. One significant concern is the registration process for users on the GSTN website, as any delays in registration can lead to serious issues affecting the overall viability of GST.
In addition to the registration challenge, the GSTN faces difficulties in auditing processes. Verifying and ensuring the accuracy of data within the GSTN poses substantial challenges, especially considering the expected 70 million users. Without a reliable mechanism for proper data audit, establishing the efficient functionality of the GST system becomes a formidable task. Addressing these issues in the GSTN’s technology backbone is imperative for the successful implementation and sustained operation of the GST system in India.
Problems of Implementation of GST: Anti-Profiteering Clause
Also included in the problems of implementation of GST in the implementation of Goods and Services Tax is the hyped expectations regarding the system’s anticipated benefits, particularly the reduction of prices for various goods and services across the economy. The premise is that businesses, benefiting from a reduction in the impact of double taxation, should pass on these advantages to the end user. To prevent unwarranted profiteering from changes in the tax system, an anti-profiteering clause has been incorporated into the GST framework. This clause mandates that businesses pass on any benefits resulting from tax system changes to the end consumer. However, the clause lacks a clear mechanism for monitoring anti-profiteering activities.
The uncertainty surrounding the anti-profiteering clause raises concerns for both businesses and consumers. The private sector apprehensively views the ambiguity in this clause as potentially leading to numerous problems. Tax authorities are granted considerable discretion to make subjective judgments about whether businesses are engaging in profiteering, with no explicit laws or regulations supporting their rulings. This lack of clarity in the anti-profiteering clause may introduce uncertainty and challenges in the effective enforcement of this aspect of the GST system.
Impact on Small Businesses due to GST Exemptions
The challenges arising from documentation matching extend to complications arising from purchases made from vendors exempt from Goods and Services Tax registration. Despite a significant reduction in the threshold rate for GST registration and payment, businesses with an annual turnover below Rs. 10 lakhs for certain North-Eastern and Hill states and below Rs. 20 lakhs for other states remain exempt from GST. While this exemption carries both advantages and disadvantages for small businesses, its consequences are notable.
An advantageous aspect of GST exemption for small businesses is the elimination of taxes on goods and services they provide. This not only allows for a higher profit margin but also enables them to offer competitive prices, levelling the playing field with larger competitors. Additionally, small businesses benefit from avoiding the working capital issues faced by GST-registered businesses.
However, these advantages can be offset by the substantial administrative burden placed on businesses purchasing from GST-exempt suppliers. The responsibility falls on the purchaser to file all related documentation on behalf of the exempt supplier to claim the input tax credit. This administrative hurdle introduces complexities that may negate the benefits of GST exemption for small businesses, creating a potential disparity in the competitive landscape. Finding a balance between these advantages and administrative problems of implementation of GST is crucial to ensure the smooth functioning of the GST system for small businesses in India.
Final Thoughts
There are many problems of implementation of GST. Issues such as intricate documentation requirements for Input Tax Credits, administrative burdens on buyers dealing with GST-exempt suppliers, and uncertainties surrounding the anti-profiteering clause contribute to the complexity. The functionality of the Goods and Services Tax Network poses a critical challenge, impacting user registration and data accuracy verification. Furthermore, the ambitious goal of lowering prices through GST benefits is hindered by the lack of a robust mechanism to monitor anti-profiteering activities. Addressing these challenges is pivotal for the smooth and effective execution of the GST system, ensuring its intended advantages for businesses and consumers alike.
