[Document title]

Public Finance

“Challenges in Implementation of GST in

India”

Sumedha Gupta

Shri Ram College of Commerce

University of Delhi
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Abstract

The year 2017 is regarded as a landmark in Indian economic history as

it witnessed the implementation of one of the most important
economic reforms in India - the Goods and Services Tax (GST), which
subsumed almost all indirect taxes at the Central and State levels. This
so-called ‘one nation, one tax’, aims to provide a simplified, single tax
regime similar to several major economies across the world. This single
tax has streamlined a number of indirect taxes and has made
businesses more efficient. The implementation of the GST was widely
supported by the industry, which looked at this tax reform as an
opportunity to redefine its supply-chain model, enhance IT processes,
and evaluate its internal and external arrangements to minimise their
tax costs. However, after multiple policy updates, it seems that not
everything has unfolded as planned. GST in India not only boasts one of
the highest tax rates but also consists of the largest number of tax
slabs. In addition to this, there exists increasing compliance burdens,
along with technical and compliance issues. The present study is an
attempt to understand the barriers to the smooth implementation of
GST along with highlighting the basic concept of GST and its model in
Indian context.
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Table of Contents

S.no. Particulars Pages

1. Introduction 4

2. Challenges in Implementation of GST 7

3. Status of implementation of GST 12

4. Conclusion 13

5. References 14
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Introduction
History

India’s reform of indirect tax regime was initiated in the year 1986 under Rajiv Gandhi’s
government, when the Modified Value Added Tax (MODVAT) was introduced. Following
this, FM Manmohan Singh, initiated discussions on a Value Added Tax (VAT) at the state
level. Finally, a single "Goods and Services Tax (GST)" was proposed in 1999 by PM Atal
Bihari Vajpayee and his economic advisory panel, after which a separate committee was
set up to design a GST model. Since then, it took about 17 years of herculean effort by a
number of political leaders, senior officers, tax experts and other stakeholders before GST
was finally launched on 1 July 2017.

The first country to implement the GST was France, in the year 1954, and since then
approximately 160 countries have adopted GST system in different forms. Some of the
countries with a GST include Canada, Vietnam, Australia, Singapore, United Kingdom,
Monaco, Spain, Italy, Nigeria, Brazil, and South Korea.

Concept

Goods and Service Tax (GST) is an indirect tax system levied on manufacturing, sales and
consumption of goods and services at a national level. It a tax on the value added of goods
and services at each tier of production. It works in the form of a continuous chain of set-off
benefits from the manufacturer’s stage up to the seller’s stage leaving the final burden on
the consumer.

GST in India
The introduction of GST in India subsumed several taxes and levies such as central excise
duty, services tax, additional customs duty, surcharges, state-level value added tax and
Octroi, making it a comprehensive tax. Further, it is multi-staged, being imposed at each
stage of the production process or “value addition”. However, it is refunded to all parties in
the various production stages and thus, the final burden of GST lies with the final consumer,
making it a destination-based tax.
GST system is predicated on an similar concept to VAT. Instead of the set-off being available
for the tax paid in the previous level, in GST it would be charged only at the time of sale. In
the pre-GST regime, every purchaser including the ultimate consumer paid tax on tax. This
tax on tax is named cascading effect of taxes. GST has removed this cascading effect because
the tax is calculated only on the value-addition at each stage of the transfer of ownership.
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Model
India has adopted a dual GST model, which implies that tax is administered by both the
governments - Union and State. Thus, GST has two components: Central Goods and Service
Tax and State Goods and Service Tax.

GST

Intra-State Inter-State
Movement Movement

CGST SGST IGST

Transactions within a one state are levied with Central GST (CGST) by the Central
Government and State GST (SGST) by the State governments. For inter-state transactions,
Integrated GST (IGST) is levied by the Central Government.
GST is a consumption-based tax, which is the reason taxes are paid to the state where the
products or services are consumed not the state in which they were produced.
IGST complicates tax collection for states by disallowing them from collecting the tax owed
to them directly from the Centre. Under the previous system, a state was required to deal
with only a single government for the purpose of collecting tax revenue.

Applicability
GST is applicable to all Goods and Services sold or provided in India, except for exempted
goods which fall outside its purview. It is levied on all transactions like sale, transfer,
purchase, barter, lease, or import of goods and/or services. No distinction exists between
goods and services for levying of tax under GST.

Payment and Input Tax Credit

GST is charged and paid separately for the Central and State levels. The facility of Input Tax
Credit at Central level is available in respect of Central GST, that is, the ITC of Central GST is
not allowed as a set-off against State GST and vice versa.

Rate
Rates charged across all states and the central level are uniform along with the regulations,
definitions and classifications. The rates are decided by the GST council, a centrally
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empowered authority, consisting of state representatives and headed by union finance

minister. This council ensures that the ratio of revenue receipts to the respective sales (tax-
bases) does not fall for both, the Central and State governments, that is, the GST rates are
to be made revenue neutral.

Initially, GST had merged the indirect central and state taxes into a four-tier schedule of 5,
12, 18 and 28 percent. While necessity goods were taxed at 5 percent and luxury and
consumer durable goods at 28 percent, most goods and all services were taxed at the
standard rates of either 12 or 28 percent.
The latest slab rates have been revised to 0, 5, 12, 18 and 28 percent.

Items Exempted Items under 5% Items under 12% Items under 18% Items under 28%
Milk, eggs, curd, Kerosene, coal, Butter, ghee, Hair oil, LED TV, AC, Luxury
Fresh vegetables tea, spectacles, almonds, mobile, toothpaste, mid Cars, tobacco
and fruits, Un- frozen vegetables ayurvedic products size cars, products, cement
branded wheat and fruits, computers, pasta,
and rice, pooja branded wheat ice cream, printers,
Items and rice, footwear CCTV
< Rs.500, apparel
< Rs. 1000

Objectives:

The present and past governments of National Democratic Alliance(NDA) and United
Progressive Alliance(UPA) have listed the following as the objectives of GST:

1. To enhance growth and reduce inflation;

2. To shift the tax burden from producers and suppliers to final consumers;
3. To integrate the national market;
4. To improve tax compliance;
5. To mitigate the cascading effect of taxation;
6. To make a simpler and more transparent tax system;
7. To be beneficial for both taxpayers and tax administration;
8. To be beneficial for both centre and the states in terms of revenue.

Challenges in Implementation of GST

With the introduction of a major tax reform in indirect taxation system, that is, introduction
of GST, the tax collection equations have significantly changed. By replacing the multiple tax
system with a single unified tax, GST has simplified the India’s indirect tax regime but a
plethora of roadblocks have posed a challenge in its implementation. Some of them are
enumerated below.

Extensive training to Tax Administration Staff:

GST, being a rather novel concept for the country, necessitated the need to properly train
the entire tax administration staff from state to central government in terms of concept,
legislation and procedure to be adopted under this new tax regime. Consequently, the
operations of several banks and other institutions were disturbed and they are yet to gain
their complete hold of GST.

High Compliance Cost:

Under GST law, an assessee is required to file as many as 37 returns in a year, which
consists of three returns per month and one return annually. This is almost trifold as
compared to that of 13 returns in the previous system of taxation. Moreover, for persons
with operations in multiple states, the number of return to be filled shall increase
proportionately. This causes the amount of cost in terms of compliance, logistics etc. to
significantly rise.

GST law also mandates all services providers to acquire their registration in each and every
state where their services are being rendered. Preparing separate billing systems,
assessments and separate input credit for each location is a heavy task in itself. Such
increased compliances in view of the complex structure of certain industries, makes
separate registration for them an added hassle in complying with the law.

A Regressive Tax:

GST is a regressive tax since it has a heavier effect on low income earners, that is, the tax
consumes higher proportion of their income in comparison to those earning a relatively
higher income. This is because the tax base in GST is expenditure, not income. Accordingly,
everyone who consume goods and services must pay GST. Majority of the country’s
population is poor and lower middle class, which consume these goods and services daily,
causing them to bear this burden of GST.
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Multiple Tax Rates:

GST was specifically designed to simplify the tax structure. Therefore, a single tax rate
seems appropriate and has actually been adopted in various countries where GST has been
implemented so far. However, India has resorted to adopt a dual model of GST consisting of
multiple tax slabs of 5%, 12%, 18% and 28%. These multiple tax rates are actually posing a
challenge to the self-objective of GST – simplification of tax structure.

Negative effect on Service sector:

Following the incorporation of GST, majority of the service sector is taxed under the 18%
slab. This rate is higher than the previous rates which were inclusive of cess. Thus, it
indirectly causes an increase in the spending of a large population of end consumers
because these industries, such as telecommunication, who have a large consumer base
spread across the country, tend to increase their rates.

Loss of revenue to some States:

GST stands as consumption-based destination tax. This implies that the state where
consumption takes place will collect the tax. It stands as a blessing for consuming states,
whereas manufacturing states do not receive their share of taxes. In order to overcome
this problem, the Compensation Act was introduced which further adds up to the
complications of calculation of compensation.

Complex Place of Supply rules:

With the introduction of GST, the taxing events of (a)manufacturer under central excise and
(b)provision of service under service tax, have now converged into one taxing event of
supply. GST is levied on the basis of supply of goods and services. Therefore, the Place of
Supply rules are an important factor in determining the tax liability. It is significant to get
the place of supply right under the Goods and Services Tax (GST). Typically, the state
towards which the goods are shipped receive the GST revenue.

Under GST all intrastate services are subject to State GST while interstate provision of
services is under central GST. This causes unnecessary complications for intangible delivery
of services. Also, in case of inter-state supply of services, the question of state jurisdiction is
a critical matter to decide upon.

Generally, when the location of the supplier and the place of supply are in two different
states, the tax charged by the supplier would be Integrated GST (IGST). When they are in the
same state, it’s Central GST (CGST) and State GST (SGST). However, there is increased
complexity in determining place of supply when the transaction involves three parties.
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Thus, success of GST is dependent on simple and clear-cut rules in determining the place of
supply of services.

Robust IT Network:

Another challenge in implementing GST is maintaining a robust IT network that could

facilitate the working of GST by integrating the state governments, trade & industry and
other stakeholders on real time basis.

For this purpose, GSTN was incorporated. The Goods and Services Tax Network (GSTN) is
the IT network that provides the computing resources to power the entire system of
tax collection and filing under the GST system. It acts as a link between the taxpayers and
the government, integrates the State and Central governments for taxation purposes, and
helps both the central and the state governments to keep a record of all financial
transactions made by businesses.

The GSTN software is the backbone of the entire taxation system of GST and must stand the
test of time because, with all the registered persons filing their returns continuously on a
monthly basis, the systems are expected to come under pressure.

Migration Challenges:

Migration process is an added task which requires additional manpower as well as costs.
Post GST, businesses have to ensure that not merely them, but their vendors are registered
on the GST network as well.

Ensuring migration is an important task because dealing with non-registered vendors can
increase the compliance burden, affect the ability to claim ITC and negatively impact
compliance ratings.

Many companies have had to rework long-term contracts with customers and standardize
them while migrating to GST.

The greatest problems in implementation of GST are that the companies needed to revamp
their tax and IT infrastructure entirely to enable them to comply with GST law. Secondly,
the banks have to handle entire major task of transactions online, which they were not
sufficiently prepared for. CBIC also had a major task to get integrated for the thing to go on
smoothly.
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Anti-profiteering authority:

The anti-profiteering clause poses another practical challenge. As per this clause, the
businesses have to pass on the tax cuts to the customs entirely. For products where MRP is
composed of many items apart GST, it’s a great issue.

This authority is responsible for ensuring that the tax reduction rates on account of GST
implementation results in a commensurate reduction in prices.
Although this allows the government to monitor prices of different commodities, it
interferes with the free market determination of prices on the basis of demand and supply.

Since price a good or service is dependent on a combination of factors and the costs of
these factors keep fluctuating, it may be difficult to determine if a cut in tax rates has led to
a corresponding fall in price of commodities. Another concern is that companies may
collude together to rig prices; however, the Competition Commission of India has the right
to intervene and impose penalties.

Challenges for SMEs

A large portion of small and medium enterprises (SMEs) are of the view that the GST is not
entirely good for them and their worries are not totally void.

GST has significantly increased the dependence on the IT interface. The taxation system has
become easier but the complete taxation process from invoicing to tax payment has shifted
online. While larger organizations are better equipped to adapt to this change, most of the
small and medium enterprises are not necessarily technically savvy to do so, and are still
struggling.

Decrease in duty limits is one of the primary concerns which have led them to be cautious of
the Goods and Services Tax. Under the previous excise tax regime, no duty was paid by a
manufacturer with a gross turnover of less than Rs 1.50 crores. However, after GST
implementation, this exemption limit was considerably lowered to Rs 20 lakhs.
Consequently, a large number of SMEs and start-ups now fall under the purview of the GST
tax. Although composition levy is available, drawbacks such as no input tax credit, no
taxable invoice exist which may prevent many from availing such scheme.

Given the monthly and annual filings to be done from each and every state where an
enterprise operates, it is necessary to have the ERP system in place for all of them. While
this turned out to be seamless for the larger firms which operate from multiple state
locations, the smaller ones were challenged as they needed to get this in place.
Alternatively, this has to be done separately in all locations which adds to the cost of
compliance.
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Growth and inflation under the GST regime:

As per microeconomics, ad valorem taxes such as GST are more efficient than excise duty in
raising the same tax revenue with a lesser increase in prices or reduction in output.
However, in order to increase tax revenue, price reduction and quantity enhancement is
required. Moreover, if the effective IGST rate is higher than the RNR ( revenue neutral
rate), the real disposable income of people would come down leading to a leftward shift I
demand curve leading to lower equilibrium output.

The IGST rate has to be higher than the RNR in order to ensure net revenue gains for the
centre and some states, and no losses for the others.

Any effective GST rate which is higher than RNR causes the propensity to consume to
reduce followed by redistribution of real income against the economically weaker section of
the society, since their MPC is lower compared to the rich. A lower MPC leads to a lower
multiplier, which leads to lesser increase in aggregate output.

Since, the RNR of GST cannot be lower than the combined rate of taxes subsumed by it, at
the aggregate level, prices cannot reduce. Moreover, due to the absence of cascading
effect, the RNR has to be even higher to compensate for the revenue lost. Therefore, the
average price level is expected to rise and not fall under the GST regime, i.e. inflation is not
likely to reduce, rather expected to rise.
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Status of implementation of GST

The Economic Survey of 2018-19 and 2019-20 provides the details of various measures
taken in recent times taken to improve the implementation of GST. These include:

• Composition scheme formulated for small businessman, under which persons with
turnover up to Rs. 1.5 crore pay tax amounting to 1% - 5% of their turnover, and for
suppliers of services under which persons with turnover up to Rs. 50 lakhs pay tax
equal worth 6% on their turnover. Returns to be filed annually, with quarterly
payment.
• GST Council also allowed the migration of taxpayers from erstwhile tax regimes to
the new GST regime. For newly migrated taxpayers, the deadlines for submitting
returns such as GSTR-3B & GSTR-1 were moved from July to December and
extended till March 31.
• The latest return filing system requires filing a single return form each month. For
small taxpayers, having turnover up to Rs. 5 crore in a year, returns are to be filed
quarterly.
• The GST rate structure is being continuously rationalised as the tax base is
expanding and revenues are stabilising. Now, only around 32 items fall under the
28% slab, which are mostly luxury or sin goods.
• Multiple reliefs from GST taxation have been provided to categories of services
related to Agriculture, Education, Social Security, Construction, Tourism,
Transportation, Banking, Government services, etc.
• The composition scheme for service providers was introduced in order to boost the
MSME sector. Person with an annual turnover up to Rs.50 lakh are eligible to avail
this scheme and pay GST @ 6% but cannot avail any input tax.
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Conclusion
India has witnessed one of the greatest indirect tax reforms since
independence with the implementation of the Goods and Services Tax.
It has been almost three years since GST was launched in the country.
As it redefined the indirect taxation by subsuming almost all the
indirect taxes, it has unified the nation under a single tax umbrella of
GST. The successful merger of a comprehensive set of indirect taxes
was a challenging task in itself. As discussed earlier, the path to
successful implementation is characterised by a number of roadblocks.
However, the CBIC has been making incessant effort to rectify the
different pitfalls that waylay its complete successful implementation.
Looking at the bigger picture, GST has brought a positive impact in
different sectors, be it the Government, manufacturers, traders,
common people and has helped the country be in tune with the system
of taxation followed globally.

At its grassroots, GST is nothing but an Indian business reform, and it

has its pros and cons. Some products and services are cheaper while
others are costlier. Some sectors may benefit at the expense of some
other sectors. However, these losses/negative effects are expected to
last only in short run and may bear fruit in the long run, given the
system is well-supported by the people and continuously improved by
the concerned authorities.
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References

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booklet-03July2017.pdf
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03July2017.pdf
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services-tax
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system
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9. Overcoming GST implementation challenges in India; Livemint -
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implementation-challenges-in-Indian-federatio.html
10. Challenges in the current GST Structure : A Way Forward -
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11. 365 Days of GST : A historic Journey - https://www.pwc.in/tax-and-regulatory-
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