Avoid policy adventurism

News: Goods and services tax (GST), one of the biggest reforms in recent decades, will complete five years in July next year.

It was expected that after some initial implementation difficulties, the system would stabilise and boost revenue collection along with output. But that doesn’t seem to be happening.

While revenue collection has improved, partly because of better compliance, it is still considerably below potential.

In this regard, government has taken some measures to boost GST revenue. However, there are some concerns associated with this.

So, Experts warns that government should avoid not policy adventurism

Why there is a need to enhance GST revenue collection?

First, from next year, states will not receive their guaranteed compensation for the shortfall in revenue collection.

Second, Enhancing GST revenue would also be critical in addressing the overall fiscal stress in the country, which has significantly been exacerbated because of the pandemic.

What are the concerns associated with the recent changes in GST policy?

Some new provisions that will come into force on January 1 could further affect the GST system.

Issue of retrospective enforcement: According to one provision, the members of clubs, associations, and societies would be liable to pay GST on fees from July 1, 2017. Experts believe this will lead to litigation, particularly because of its retrospective enforcement.

There are court orders from the pre-GST period that exempted such associations from service tax on the principle of mutuality.

Issues that may arise due to discontinuation of issuing notices: Another provision that will come into force on January 1, empowers tax officials to visit the premises of businesses to collect tax in the case of a discrepancy in filings. The provision has been introduced to curb fake billing.

Earlier, notices were issued to firms that had not cleared their dues. If a company was unable to explain the discrepancy in filings even after giving a specific time period, then the tax authority proceeds with penal action.

However, now, in the case of a discrepancy, the government will now make the recovery directly without issuing any notice. Giving tax officials the powers to make direct recovery will inevitably result in harassment.

This will also go against the stated objective of the government to increase the ease of doing business in the country and will bring back the fears of inspector raj.

This is also inconsistent with the direction in which the government is moving in the case of direct tax.

What is the way forward?

The GST Council should expedite addressing the issue of revenue-neutral rates and the inverted duty structure. GST rates were reduced prematurely and need to be corrected to make government finances more stable in the medium to long run.

The Council’s recent move on correcting the inverted duty structure for man-made fibres is welcome.

Source: This post is based on the article “Avoid policy adventurism” published in Business Standard on 27^th Dec 2021.