Here are some challenges for GST in India:
High Rates and Multiple Slabs
- If Union and States abolished existing indirect taxes (Excise, Custom and VAT), then their revenue income will obviously decline. Therefore, GST rate needed be high enough to sustain any fall in revenue collection. Such ‘Ideal’ rate of GST, is called Revenue Neutral Rate (RNR). In, Singapore GST only 7%, Australia GST only 10%.
- Whereas in India we’ve 5-12-18-28% slabs. Many daily necessities are in 18% GST slab. Indirect taxes are regressive in nature & harm the purchasing power of poor families.
- Petrol, diesel, electricity are not subjected to GST regime yet, So, businessman cannot claim GST-input credit on them. Even when the crude oil prices are falling in the international market, the Union and State governments do not reduce their Union excise and state VAT on the petroleum fuels, which further aggravates the inflation and business cost.
Frequent changes harming long term business planning
- Frequent changes in GST rates makes it difficult for the companies to plan long term business strategies.
- E.g. In 2019-Sept, GST on Caffeinated beverages raised from 18% ???? 28%. This will decrease the sales. If any soft-drinks company had invested in expansion of plant- production capacity, it would suffer.
- Even 15th Finance Commission chairman NK Singh criticised the frequent changes in GST rates.
Fall in collection
In 2018: Average monthly GST collection > Rs. 1 lakh crore, but in 2019 it fell towards Rs. 98,000 crore. This happened because,
- Protectionism by USA, EU and China. Thus, Indian exports have fallen leading to production declined in manufacturing and service sector and thus, GST decline.
- Sale of automobiles, consumer durables and real estate sector fallen due to variety of factors.
- Unscrupulous traders setup phoney shell companies and generate fake invoices to claim input tax credit through Circular Trading.
As a result, States are complaining that GST compensation amount is not released in a timely fashion by the Union Government. Thus, State funded welfare schemes are suffering.
Inconvenience to Small Traders
- In GSTN web portal, the traders have to deposit the GST on monthly basis, upload various forms & invoice details, generate e-way bills. While government has tried to keep these online forms/ mechanisms as simple as possible, but since many small traders are not proficient with computer, excel / accounting software, internet, digital payments- GST-compliance creates inconvenience to them, and forces them to hire full time accountants, raising their cost of operations.
- Though, Even in erstwhile VAT system they had to upload similar documents so, it’s not new or alien system imposed on them. Besides, they can opt for the GST composition scheme where they have to upload things on quarterly basis instead of monthly basis. GSTN portal also provides free accounting software to small traders so they don’t have to spend more money in buying proprietary software like Tally.
- GSTN server crashes often so trader can’t upload document on time, and then they have to pay penalty for crossing monthly deadlines.
- Though, GST Council has reduced the late fees.
- GSTN portal has been given technical upgrades to reduce the glitches/outages.
- Some people argue Malaysia scrapped GST in 2018 due to popular uproar against it, So it will not be successful in India either!
- Though, Malaysia had subjected all the goods and services to a flat rate of 6% and the opposition parties were blaming it for the inflation, and there were many political dimensions to the entire controversy. Whereas in India, we have kept many daily necessity goods at 0% to 5% GST. RBI has been successful in keeping the inflation within 2-6% CPI limit.