GST Council meeting: Why simplifying registration, refunds must be key focus

The long-delayed GST Council meeting is scheduled for October 7. It may be recalled that at the GST Council's first meeting in 2016, when the Rules of Procedure and Conduct of Business were finalised, the council agreed and minuted that it should meet every quarter. This has, of late, happened only in breach – the 57th council will meet after a gap of more than a year.

Manufacturing goes strong

The GST Council is meeting in the backdrop of strong September GST revenue numbers. The ₹2 lakh crore gross GST revenue, indicating 14 per cent plus growth despite global headwinds, is a commendable performance. The growth of the PMI manufacturing index to 55.1 in September from 52.8 recorded in the previous month has been reflected in the revenue performance. Electronics, food, pharmaceutical, and textile are sectors products that have driven the sharp increase in the PMI. As S&P Global has pointed out in its monthly report, it is the fastest since February.

FTAs, drop in refunds key drivers

One can but assume, in the face of the PMI manufacturing index, that domestic economic activity has certainly played a role. But as analysts have pointed out, while gross GST revenue has increased by around 10 per cent, the GST revenue from imports has grown by about 26 per cent.

Also read: Rs 2-lakh-crore GST haul in September masks a bigger import story

We do not have any granular data regarding the nature of imports – whether it is raw material or capital goods or finished products. Imports are only likely to go up further because of the FTA (Free Trade Agreements) signing spree we are currently on. Net GST has grown by more than 18 per cent – because of a decrease in refunds, which by itself is not a good thing. Money due to the taxpayer should be returned.

What to expect from meet?

What then should be the focus of the 57th meeting?

The 56th meeting had recommended the much-heralded GST 2.0 reforms. The rates were dramatically reduced, as was the number of slabs. A major concern of industry was addressed. Many of the challenges being faced by GST at present, like the inverted duty structure leading to credit accumulation, can be addressed only if we move to a single rate. This should be accompanied by reducing, if not eliminating, all exemptions which break the flow of credit. Neither of these is likely to happen anytime soon. Hence, it is expected that the meeting will largely focus on processes. While the agenda is unknown at the time of this piece being written, we can suggest the areas of possible focus.

Registration must be simplified

Businesses will expect and look forward to further simplification of processes leading to ease of doing business. Registration is the critical beginning point of an assessor’s engagement with the Department of Revenue. The rules and the processes in place now have assured eligible low-risk applicants that registration will happen within three working days.

Unfortunately, almost all the cases of fraud which the department detects relate to fake registration – where the applicant is not present at the address given, avails ineligible credit and apparently disappears in thin air. Consequently, the department feels constrained to exercise further diligence. As a result, the promised registration within three working days does not happen.

Also read: 57th GST Council meet: Arrest powers, input-tax-credit reforms on Oct 7 agenda

Action against defaulting supplier

The very USP of GST is the uninterrupted flow of input tax credit. A problem which occurs, again because of the legal provisions put in place by the department to check misuse, is when a taxpayer, who has purchased a supply and paid the tax as invoiced to the supplier, does not get the credit because the supplier has not complied with the requirements of the law. The supplier is expected to pay the GST received to the government. Where he does not, a mismatch occurs, and enquiries can be initiated against both the supplier and the recipient. Ultimately, technology needs to provide a solution whereby action can be taken against the defaulting supplier rather than punish the recipient.

Refund of accumulated credits

The refund of accumulated credits is another area of concern. Undoubtedly, more than ₹27,000 crore has been refunded in the month of September, but there are still concerns expressed by the industry. While up to 90 per cent refund has been assured, there are reports to suggest that there are too many caveats attached. This effectively reduces the chances of any refund being sanctioned.

The issue of inversion of rates is the largest single cause for the accumulation, and so are legal impediments (restrictions on types of input services/goods on which credit is available), structural challenges (the whole range of petroleum products being outside GST, for instance) – all of which militate against the very design of GST.

As mentioned at the outset, a single rate is the answer for many of the accumulation of credit issues. But that is not going to happen soon.

Also read: Gross GST collections rise 14.8 pc in August; net revenue up 8.3 pc

Credit of tax paid at the earlier stages of a process is the backbone of GST. So, the next best solution is to closely monitor the existing provisions and look at solutions by which accumulation is reduced and ensure an effective refund process on the ground. Many a well-meaning policy can fail at the hands of a non-empathetic tax official.

Speedy disposal for free flow of money

While it will be difficult and impractical at the level of the council to monitor pendency in adjudications, arrears, and appeals, it should impress upon the administrations at the Centre and the states the need for speedy disposal. All these represent blocked money – both for the administrations and the taxpayer. The council should call for a report on the functioning of the GST tribunals; reports suggest their functioning is still largely bogged down by administrative constraints.

Also read: GST 2.0 explained: What India’s new tax regime means for you | K Vaitheeswaran interview

States will have to get over their angst of losing their powers of taxation, as well as their grievance about the compensation cess having come to an end. The focus should be on tax administration, the aim being to address glitches and improve taxpayer experience, so that paying taxes becomes a smooth, if not pleasant, process.