GST Fix: Why Force Small Businesses To Pay Tax Even Before They Get The Money?

What we have in India may not be a perfect GST, but it was one of the only possible versions that could be implemented given the political considerations.

Were there any simpler versions that could also be implemented and were politically feasible? Perhaps we may never know. But the fact remains that GST has become a reality and we have witnessed a drastic reduction on the tax burden on most of the commodities.

In fact, nearly 99 per cent of all commodities are either taxed at 18 per cent or lower.

All of these suggest that we are close to a final version of the GST which may well see further simplification- including the possibility of having just thee rates (including 0 per cent) or perhaps inclusion of alcohol and petroleum products in the GST over the next couple of years.

Post a couple of years into introduction, it’s evident that what we have now looks like the final version of the GST but there is still some room for improvement.

The present economic slowdown is in fact the best opportunity to introduce GST 2.0 and the first step would be to merge the 12 and 18 per cent slab into a single 15 per cent slab. This should be followed up with a rigorous exercise over the next few months to reduce the number of goods under the 28 per cent slab.

It is about time that we recognise that India is no longer a poor country, but it is instead a middle-income country.

Therefore, there is no rationale for a 28 per cent GST on small cars or air-conditioners and refrigerators. There’s a need to move to a value-based approach when it comes to identification of the goods that should be taxed at 28 per cent.

A refrigerator is fairly common in urban poor households in 2019, and therefore, we need to come out of our belief that we are still as poor as we were before the 1990s.

Our taxation policy too should reflect this decline in poverty levels that we have witnessed over the last couple of decades.

Another surprising fact is that the GST Council taxed biscuits at 18 per cent even for those that cost less than Rs 100 per kilogram. It is yet again absurd because biscuits are no longer consumed by just the affluent sections of our society.

For those biscuits that cost less than Rs 100, the GST should be at 0 per cent while for others it should ideally be at 5 per cent if not at a common rate of 15. Therefore, there is still work to do as far as refining the indirect taxation system is concerned and these minor tweaks should come sooner rather than later.

It is important to remember that changes in the GST require consensus in the GST Council and therefore, one should not put the entire onus on the central government.

However, the Finance Minister can play a leading role in terms of building the necessary consensus towards bringing about such changes. A good practice going forward would also involve releasing the detailed transcripts of submissions made by respected finance ministers.

This would ensure complete transparency and it will put the pressure of public scrutiny to ensure that some of these reforms are accepted by the council.

As a matter of fact, even the Monetary Policy Committee shares the complete transcript of the meeting through a press release and this is something that should be explored over the next couple of months.

Another important reform as suggested by Ashutosh Muglikar is to move to a receipt-based GST system for small enterprises.

At present, the moment an invoice is issued, the firm is subject to a liability for the GST and it has to pay it irrespective of whether it has received the payment of invoice from the buyer of its products.

An advantage of the system is that it enables the firm to claim credit as it raises invoice, but the downside is that it has to pay GST upfront without realising its payment.

Under the receipt-based system, the company would have to pay the GST only once it has received the payment for its goods. A switch to receipt-based system makes it easier for small firms to effectively deploy their working capital.

Therefore, there are merits in allowing small firms as defined by the government to decide between either the receipt-based GST system or the present accrual-based system. Australia, for instance, provides small businesses with this choice while for the large firms they have to follow the accrual-based system.

There are strong arguments for a GST 2.0 and the current economic slowdown provides the perfect pretext for achieving it. This overhaul will simplify the taxation structure for good and act as a counter-cyclical policy measure which will go a long way in the revival of economic growth.

While we overhaul our indirect taxation structure, there’s an urgent need to reform our direct taxes too.

Hopefully, the Direct Tax Code will do just the same but until then, we should at least bring parity in terms of applicability of corporate tax on private limited companies (irrespective of turnover), proprietorship firms and limited liability partnerships.

There are a lot of low-hanging fruits out there that will kick-start our growth engine; now is the time to start plucking them one by one.