India's GST Journey: Eight Years of Transformation, Triumphs, and Tribulations

Abhishek Pandey

As India marks eight years since the implementation of the Goods and Services Tax (GST), it's a fitting moment to reflect on this landmark tax reform. Heralded as "One Nation, One Tax," GST has fundamentally reshaped India's economic landscape, aiming to unify the country into a single market. Yet, its journey has been a complex tapestry of significant achievements and persistent challenges.

The Genesis: From Vajpayee's Vision to Modi's Implementation

The idea of a unified indirect tax system isn't new to India. Its roots trace back to 2002, when the Atal Bihari Vajpayee-led NDA government, under the recommendations of the Kelkar Task Force, first conceptualized the GST. This initial period was largely about laying the groundwork and building consensus. The sheer complexity of reforming India's multi-layered tax structure, coupled with the need for legislative changes and state buy-in, meant the vision couldn't be immediately actualised.

The baton then passed to the Congress-led UPA government in 2009. They pushed forward, introducing the 115th Constitution Amendment Bill in 2011. However, this phase was fraught with significant hurdles. States feared revenue losses, especially concerning their autonomy over critical revenue sources like petroleum and alcohol. Concerns over the design of the dual GST, the need for robust IT infrastructure, and unresolved issues like the Central Sales Tax (CST) compensation led to prolonged political stalemates and the bill eventually lapsing in 2014.

It was the Narendra Modi-led BJP government that successfully navigated these turbulent waters. Coming to power with a strong mandate, they leveraged cooperative federalism, engaged extensively with states through the GST Council, and built a robust digital backbone in the GST Network (GSTN). After extensive deliberations and a crucial constitutional amendment, GST was finally rolled out on July 1, 2017, marking a historic moment for India's indirect tax regime.

Eight Years On: Hits and Misses

In eight years, GST has brought about monumental changes:

• Hits:

  • Unified Market: It replaced a multitude of central and state indirect taxes, eliminating geographical barriers and fostering a truly national market.

  • Cascading Effect Eliminated: The seamless flow of Input Tax Credit (ITC) has largely removed the "tax on tax" phenomenon, reducing the final cost of goods and services.

  • Increased Tax Base & Revenue: GST's digital framework and expanded compliance base have consistently led to higher tax collections. Monthly GST revenues frequently cross the ₹1.6 lakh crore mark, with the highest ever collection recorded at ₹2.10 lakh crore in April 2024. The number of active GST registrants has also grown significantly, from around 65 lakh in 2017 to over 1.40 crore today.

  • Digital Transformation: The GSTN portal has streamlined compliance, filing, and refunds, enhancing transparency and efficiency.

  • Logistics Efficiency: Reduced border check posts and faster movement of goods have significantly improved logistics and supply chain efficiency.

    
    

• Mishits:

  • Compliance Burden for MSMEs: Many Micro, Small, and Medium Enterprises (MSMEs) initially struggled with the digital compliance requirements, multiple return filings, and often faced liquidity issues due to delayed ITC refunds.

  • Rate Rationalization: Despite efforts, the multi-slab rate structure is still complex, and a simpler 3-slab structure (e.g., merit, standard, demerit) is a long-standing demand.

  • Exclusion of Key Sectors: The continued exclusion of petroleum products, electricity, and alcohol keeps them outside the ITC chain, perpetuating some cascading effects and limiting GST's full potential.

  • Uncertainty in ITC Rules: Frequent changes and ambiguities in ITC rules have created compliance challenges and disputes.

    
    

The Missing Piece: Why the GST Tribunal is Still Not Operational

One of the most significant "mishits" is the non-operational Goods and Services Tax Appellate Tribunal (GSTAT). Despite being provisioned for, the Tribunal has faced constitutional and legal challenges (e.g., Madras High Court ruling on tribunal composition), Centre-State coordination issues, and bureaucratic delays.

The absence of a functional GSTAT means that businesses have no dedicated, specialized forum for the speedy resolution of GST-related disputes. This has led to:

• Escalating Disputes: Litigants are forced to approach High Courts, leading to prolonged and costly legal battles.

• Massive Backlog: The High Courts are burdened with increasing numbers of tax cases, leading to significant delays in justice delivery.

• Impact on Businesses: Disputes tie up working capital, increase legal costs, and create an environment of uncertainty, particularly affecting MSMEs.

• Differing Interpretations: Without a national appellate body, there's a risk of divergent rulings from different High Courts, undermining the "One Nation, One Tax" principle.

The Finance Act 2023 amended the CGST Act to address the structural issues, and appointments are underway, but the operationalisation remains a critical pending task for the government.

Impact on Businesses: Winners and Losers

GST has been a mixed bag for Indian businesses:

• Beneficiaries:

  • Startups and Small Businesses (with higher turnover): Benefited from a simplified, unified tax structure and easier interstate operations. The composition scheme offers relief for smaller players.

  • Logistics and Warehousing: Saw significant gains from reduced inter-state border delays and the consolidation of warehouses, leading to cost efficiencies.

  • Organized Retail: Benefited from easier input tax credits and a more level playing field against the unorganized sector.

  • Digital Economy: Thrived on the digital-first approach of GST, streamlining operations and tax compliance.

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• Sufferers (or those who faced initial pain points):

  • MSMEs (especially smaller ones): Faced initial challenges with digital adoption, increased compliance costs, and difficulties in navigating complex refund processes. Some struggled with liquidity due to delayed ITC.

  • Sectors with High Compliance Needs: Businesses requiring frequent invoice matching and reconciliation found the process cumbersome.

  • Manufacturing Sector: Some manufacturers faced working capital blockages due to ITC accumulation, especially if their output was exempt or had a lower tax rate than inputs.

  • Independent Businessmen/Traders: Some unorganized players faced increased tax burden and compliance requirements, pushing them towards formalisation.

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The Future of GST in India: GST 2.0

The future of GST in India, often dubbed "GST 2.0," focuses on further refinements and expansion:

• Rate Rationalization: Moving towards a simpler 3-slab structure to reduce complexity.

• Inclusion of Excluded Items: Bringing petroleum, electricity, and alcohol under the GST ambit to complete the ITC chain and maximize efficiency.

• Streamlined Compliance: Further simplifying return filing, audit processes, and easing credit restrictions to reduce the compliance burden.

• Operationalizing GSTAT: Ensuring the swift establishment and functioning of the GST Appellate Tribunal for timely dispute resolution.

• Data Analytics: Leveraging the vast data generated by GSTN for better policy formulation, compliance monitoring, and identifying tax evasion.

  
  

Global Perspective: Successes and Failures

GST, or VAT (Value Added Tax), is a widely adopted indirect tax system globally, with over 160 countries implementing it.

• Successful Implementations:

  • New Zealand: Often cited as a model, New Zealand's GST is characterized by its broad base (almost no exemptions), single rate, and a robust digital system. Its success is attributed to comprehensive planning, effective public awareness campaigns, and a focus on simplicity.

  • Canada: Implemented a dual GST system (federal and provincial), similar to India, which has largely been successful in harmonizing taxes and broadening the tax base.

  • Australia: Successfully transitioned to GST, replacing a complex Wholesale Sales Tax. Its success stemmed from replacing a declining tax base, ensuring revenue stability, and integrating well into their existing tax infrastructure.

  • Generally, developed nations with mature financial systems and robust tax infrastructures, like those in the European Union, have seen smoother and more effective GST implementations, leading to stable revenues and reduced tax evasion.

• Failed Implementations:

  • Malaysia: A notable example of a failed GST implementation in 2015. Despite aims to broaden the tax base and increase revenue, it was highly unpopular and ultimately abolished in 2018. The reasons for its failure included:

    • Hasty Implementation: Insufficient time for businesses and the public to adapt.

    • Public Discontent: Perceived increase in prices and impact on the cost of living, especially for lower-income households.

    • Poorly Functioning Refund Mechanism: Businesses faced significant delays in receiving refunds, tying up working capital and causing liquidity issues. There were also allegations of refund money being diverted.

    • Compliance Burden: High initial compliance costs and complexities for small businesses.

    • Tax Evasion: Difficulty in verifying retail sales and controlling the black economy.

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India's GST journey, while challenging, has largely been a success story in terms of revenue growth and market unification. The road ahead involves ironing out the remaining complexities, particularly operationalizing the GST Tribunal and rationalizing the tax structure, to truly realize its full potential as a simplified and efficient tax regime.