In contrast to the states, the Union lacked the safety net of compensation for a revenue deficit during the early years
- Economic Impact: The ideal of a single tax rate has been replaced by a multi-slab structure (0%, 5%, 12%, 18%, 28%) plus a compensation cess on demerit goods. This creates classification disputes, encourages lobbying for rate changes, and distorts resource allocation.
- Administrative Burden: The complex structure leads to issues like the Inverted Duty Structure (IDS), where inputs are taxed at a higher rate than finished goods. This blocks working capital for businesses, especially in sectors like textiles and fertilisers, and complicates the refund process.
- Impact on MSMEs: For small and medium enterprises, the compliance burden remains high. Navigating multiple rates, complex HSN codes, and intricate return filing processes necessitates professional help, increasing their operational costs and undermining their competitiveness.
- Legal & Policy Instability: The GST framework has been characterised by a continuous stream of notifications, circulars, and amendments. This “rule by notification” creates an unstable policy environment where businesses struggle to keep up with changes, making long-term planning difficult.
- Governance & Federalism: While the GST Council is a celebrated model of cooperative federalism, its frequent meetings and decisions, often driven by political and revenue considerations, have contributed to the instability. The tension between the Centre’s and States’ revenue needs often leads to ad-hoc changes rather than a stable, long-term policy vision.
- Technological Challenge: The GST Network (GSTN), the technological backbone of GST, has faced its own set of challenges. While it has stabilised over time, periodic glitches and the complexity of integrating it with business accounting systems create uncertainty and compliance hurdles.
- Input Tax Credit (ITC) Uncertainty: The ITC regime, the core of GST, has been the biggest source of unpredictability. Rules for availing credit have been frequently tightened, with provisions linking a buyer’s credit to the supplier’s compliance (e.g., Section 16(2)(aa)). This punishes honest taxpayers for the defaults of their suppliers, making cash flow unpredictable.
- Dispute Resolution Mechanism: The lack of a centralised National Appellate Authority for Advance Rulings (NAAAR) has led to a chaotic situation where different state-level Authorities for Advance Rulings (AARs) provide contradictory rulings on the same issue. This creates legal ambiguity and unpredictability for businesses operating across multiple states.
- Exclusion of Key Sectors: Key items with high revenue potential, such as petroleum products, electricity, alcohol for human consumption, and real estate, remain outside the GST ambit. This breaks the input tax credit chain, leads to a cascading of taxes, and prevents the realisation of a truly unified market. The constant debate over their inclusion, without a clear roadmap, adds to the unpredictability.
- Rate Rationalisation: The primary step is to rationalise the multiple slabs. A three-rate structure—a merit rate for essential goods, a standard rate for the majority of goods and services, and a demerit rate for luxury/sin goods—should be the long-term goal. This will reduce classification disputes and simplify compliance.
- Inclusion of Excluded Sectors: A phased roadmap for bringing petrol, diesel, and other excluded items into the GST fold must be created with political consensus. A mechanism to ensure revenue neutrality for states will be critical for its success.
- Simplified Compliance for MSMEs: Introduce a single, simplified annual return for MSMEs below a certain turnover threshold, reducing their compliance burden significantly.
- A Comprehensive GST Code: Instead of frequent amendments via notifications, there should be a consolidated and robust GST Code that is amended only through a formal legislative process, perhaps once a year. This will provide greater policy stability.
- A Predictable Calendar for Rate Changes: The GST Council should commit to a policy of reviewing and changing rates only at pre-scheduled intervals (e.g., once a year), except in cases of national emergency. This will allow businesses to plan their pricing and investment cycles effectively.
- Grandfathering Clauses: For major policy shifts, introducing “grandfathering clauses” can protect investments made under a previous set of rules, thereby enhancing investor confidence and policy stability.
- Strengthening the ITC Framework: The ITC rules must be simplified and made more predictable. The focus should shift from denying credit to compliant buyers to strengthening enforcement and data analytics to catch fraudulent suppliers.
- Operationalise the National Appellate Body: The establishment and full operationalisation of the National Appellate Authority for Advance Rulings (NAAAR) is urgently needed to ensure uniformity and predictability in tax rulings across the country.
- Transparent Policy Roadmap: The government and the GST Council should publish a 5-year vision document for GST reforms. This will provide a clear, predictable path for the evolution of the tax system, allowing businesses to align their strategies accordingly.
