Union Budget 2021: GST continues to be a challenge; govt must make changes to ease compliance burden

Santosh Dalvi
·5 min read

Every Budget proposes change in tax policy, procedures, tax rates and compliance. Albeit every change is not beneficial to the taxpayers in general but as a Greek philosopher, Heraclitus said, 'Change is the only constant in life'. It is a very apt quote especially for Goods and Services Tax (GST) where a taxpayer has to constantly deal with changing regulation.

Even after three years of GST introduction, the taxpayers are still facing challenges in coping up with the ever-changing nuances of GST law. Therefore, taxpayers expect the government to 'make changes' in the GST law with an aim to 'ease compliance burden'. There are some key challenges which the industry expects the government to address in the upcoming Budget.

During the introduction of GST in July 2017, certain petroleum products and electricity were kept outside GST with intent to bring them into the GST regime later. However, even after a lapse of 3.5 years, there is no clarity on their inclusion in the GST regime.

These products are currently subject to multiple Central and state taxes with no input tax credit leading to increased price burden to the producer/consumers alike. Therefore, there is an urgent need to announce a roadmap for the inclusion of these products under the GST regime. The inclusion of these products in GST will not only benefit producers, distributors, but also consumers.

It will also provide a much-needed relief from managing compliances under multiple laws.

The government has implemented the GST regime with minimal exemptions/exceptions to broaden the tax base including levy of tax on deemed supply between branches/related parties/employees. However, the coverage of Input Tax Credit (ITC) is restricted. There are several business expenses for which the ITC is blocked such as construction-related expenses, employee-related expenses, business promotion expenses, etc. The government should not use ITC restrictions to augment the revenue. The denial of ITC to legitimate business expenditure increases the cost of doing business and also dilutes the basic objective of avoiding the cascading effect of taxation and creating a seamless credit structure.

GST Compensation Cess was introduced for an initial period of five years to compensate states from a revenue shortfall. However, the GST Council in its 42nd meeting decided to extend the levy of GST Compensation Cess beyond five years to make up for the lower-than-expected GST revenue.

With increased restrictions on ITC, this will be another burden for consumers and such decisions also create an uncertain tax environment.

Anti-profiteering provisions were introduced to ensure that the benefits arising on account of the introduction of GST are passed on to the end consumers. However, no guidelines have been issued to assess profiteering leading to varying interpretations and consequent litigation. Also, the term of the authority has been increased by two years. The government should re-look at the need for continuing such provisions.

GST was introduced as 'one nation one tax' 'one market' and it was expected that states/tax administration will take a uniform view of the GST law. However, recently, a state government has decided to issue its own circular for the administration of state GST law. Similarly, different processes are being followed for grant of refund in some states. Such an approach if adopted by other states could jeopardise the 'one nation one tax' reform and lead to several complexities for the taxpayers.

Another matter that needs immediate attention is addressing the delay in the formation of the GST tribunal so that the taxpayers can get a fair trial and timely relief from the untenable demands from tax authorities.

The taxpayers are also struggling with frequent changes in the provisions of ITC. Recently, the government notified further restrictions on the availment of ITC to 105 percent of reported transaction as well as restricting utilisation of credit up to 99 percent for a certain category of taxpayers.

The recovery of ITC availed by buyers for tax default by suppliers is affecting honest and compliant taxpayers as they have already paid the consideration to the suppliers. Hence, they expect the government to set up a mechanism to directly deal with defaulters rather than expecting the same to be addressed by buyers.

The trade further expects the government to issue notification/circulars reasonably in advance and not at the last minute so that taxpayers can plan their activities smoothly. The ambiguity surrounding appropriate GST rates/classification of certain goods and services (e.g. applicable rate for purified/treated water, exploration-related services, automotive components, etc.) is another challenge.

The issue is arising due to multiple GST slab rates and it is expected that the government announces a road-map for reducing the GST slab rates to maximum three.

On the customs front, in line with the recent policy announcement to make India self-reliant ('Atmanirbhar') and reduce India's import dependency, one can expect customs duty rate rationalisation to provide protection to specific sectors forming part of Atmanirbhar Bharat Abhiyan such as pharma, electronics, telecom, automotive, etc.

As Union Budget 2021 will be presented in the backdrop of pandemic COVID-19, it is expected that the finance minister will primarily focus on announcing stimulus for growth and economic recovery and, schemes for improving healthcare and social infrastructure. Overall, it is expected to be a pro-industry budget to sustain and achieve economic growth with enhanced measures to monitor and prevent tax evasion.

The writer is Partner and Deputy Head of Indirect Taxes, KPMG in India; Santosh Sonar, CA, KPMG in India also contributed to this article.

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