Getting GST right

Tribune India, June 19, 2017

By Pradeep S Mehta, Amol Kulkarni and Sanjay Kumar Mangla

Prevent overcharging and ensure benefits are passed on to customers

AFEW days remain for the adoption of the first-ever competition reform — since Independence — to create a seamless national market without any distortions. As India awaits the introduction of its historic GST regime with bated breath, it will be prudent to take a look at the experiences of other countries on the introduction of GST and tackling related challenges.

GST was introduced in Malaysia, a federal country, in April 2015. It has been reported that the government received more than 5,000 consumer complaints on overcharging of goods and services in just 23 days of GST’s launch. The Malaysian government was benchmarking itself against the experience in Australia, also a federal country, which had received over 60,000 complaints during the initial period of GST adoption in the year 2000. Having prepared for the worst, the Malaysian government was able to conduct over 1,50,000 inspections during the first three weeks and issued close to 700 notices to traders to justify their price increases.

In Australia this was part of a series of competition reforms which the provinces of Australia had agreed with the federal government in 1995 under their National Competition Policy. Creating a barrier-free internal market is there in our own draft National Competition Policy which needs to be implemented in its full splendour.

Such actions are necessary to instil consumer trust and confidence in the new economy regime, which includes GST, DBT, JAM etc., and to ensure that competition distortions are removed. Given the manifold increase in complexities in India, the government needs to invest adequate resources to ensure that the benefits of GST palpably reach consumers. One is not certain if necessary steps have been taken by the union government in this regard.

In Malaysia, the complaints of overcharging mainly arose due to the selling of goods which were stocked before GST was introduced and on which the higher rate of erstwhile Sales and Service Tax (being abolished by GST) had been paid.

In India, four categories of tax rates have been fixed on Central GST — 5 per cent, 12 per cent, 18 per cent, and 28 per cent. Few basic commodities have been kept under the exempted category. Consequently, tax rates on goods and services are expected to vary from those existing. Ideally, there could have been just two bands. That said, benefits of low tax rates, wherever applicable, must be passed on to consumers, and they should not be double-taxed.

To this end, the GST legislation enables carry forward of tax credits allowed in the pre-GST era to the GST-enabled regime, subject to certain conditions. Consequently, companies should carefully record CENVAT, VAT and entry tax credits and must file their last return to avoid loss of eligible credit of these taxes. However, lack of awareness about related conditions and procedures to avail such credits persists among trade and industry. This has created uncertainty on expected final price of goods and services in the GST era, which expands the possibility of overcharging once the new regime kicks in.

While large traders are offering huge discounts to clear old stocks, such strategy might not be viable for small and medium enterprises. Further, while many businesses have stopped further stocking, the possibility of large amount of stock (taxed under the existing indirect taxation) remaining to be sold just after the implementation of GST, cannot be ruled out, escalating fears of mispricing and overcharging.

Another possible case of overcharging after GST implementation can be the products or services which are exempted from GST. The GST legislation has introduced a new concept called zero rated supply. This principle allows the dealers of tax-free goods or services to claim refund of input tax paid on various intermediate goods or services used in the final delivery of such products. To claim such refunds, the dealer is first required to get a GST registration and then file returns as well as the refund application before the government department concerned.

Given the high compliance costs and related opportunity losses, there is a possibility that small and medium enterprises or marginal traders with low amount of such refunds may shift the input tax costs of tax-free goods or services to consumers instead for bearing additional compliance burden.

Evidence shows that small and medium enterprises have to bear a disproportionately high burden of regulatory compliance. Their compliance burden under GST regime should be eased, especially in instances wherein no tax liability arises.

In order to ensure benefits of GST are passed on to consumers, Section 171 of the Central GST Act empowers the Centre to constitute an anti-profiteering authority on the recommendation of the GST Council.

It will be important for the government, along with the GST Council, to move swiftly on the constitution of such authority and set in place transparent processes for its officers to take appropriate steps to check overcharging. They should conduct surprise investigations and checks, without harassment to traders, to become aware of ground realities and the practices adopted. Further, the authority should undertake an in-depth systemic investigation on the causes of overcharging, if any, including operational difficulties faced by traders to claim tax credits. The authority staff should be selected with a proper psychometric tests having a positive mindset so that they don’t curdle the system and turn off honest traders.

In addition, the anti-profiteering authority must institute user-friendly channels for consumers to register complaints and facilitate their resolution in a time-bound manner. It should accept complaints through multiple channels, both online and offline. A feedback channel with the government must be established to enable the government to take appropriate reforms based on inputs provided by the authority.

Apparently, the existing efforts of the government and business associations on awareness generation and capacity building are targeted to businesses and limited to large cities. This is grossly inadequate. It will be impossible for these agencies to cover the entire spectrum, given the large expanse of the country and related complications involved, such as different threshold limits for exemption from GST for different parts of the country.

An alternative strategy of co-opting like-minded non-partisan stakeholders like consumer organisations and civil society groups will be important for maximum reach out, enhancing preparedness and ensuring the success of GST. The sooner the government realises this, better it will be.

(The writers are with CUTS International, an economic policy research and advocacy group)

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