Complying with myriad goods and service tax (GST) rates and requirements has been a challenge for small business owners in India. If, for example, you are a textile designer travelling to fairs around the country to promote your clothing, you have to seek a different GST number to comply with the state’s regulations. Each GST number is a separate business entity, involving complex record-keeping.
Meanwhile, restaurants and food outlets are facing a different kind of challenge. The GST rates across food items vary – sweets are taxed at 5% but savouries at 12% – and to complicate matters, the addition of a flavouring as a garnish to an item may result in a GST rate hike.
Compliance issues
As of today, GST has a five-rate structure: 0%, 5%, 12%, 18% and 28%. There is also a compensation cess, or additional levy, imposed on certain goods and services, to compensate states for any revenue loss incurred due to the implementation of GST. This was an interim measure whose deadline has now been extended to 2026.
These complex compliance requirements can get challenging
Above this, India’s GST regime has several carve outs and exemptions. For micro, small and medium enterprises (MSMEs), these complex requirements and intricate filing processes can get challenging, often leading to unintentional non-compliance.
Simplifying procedures, rationalising the rates and reducing the number of required filings would greatly benefit MSMEs and encourage higher compliance – but it’s easier said than done.
Since India implemented its GST regime in August 2017, tax revenue has more than doubled, from Rs922.83bn (US$11bn) a month to Rs2,100bn (US$25bn) in April 2024.
‘GST has played an important role in the formalisation of businesses in India’
‘GST has played an important role in the formalisation of businesses in India,’ says Anita Rastogi, principal, GST and indirect taxes, at PwC. Online tax filing and invoicing, real-time data exchange and mandatory reporting requirements have made tax evasion difficult. As a result, the number of taxpayers under this indirect tax levy has nearly trebled from 5.95 million when it was launched to 14.6 million today.
Though this growth indicates improved compliance, it is also the result of relentless focus on audits by both central and state GST authorities, together with periodic drives to stamp out evasion. In short, once MSMEs reach a revenue threshold, they have little option but to comply. But compliance itself can be daunting for MSMEs.
Rationalisation paradox
A constitutional body, known as the GST Council, deals with all issues related to GST by making recommendations to the central and state governments. The states now have limited capacity to independently manage their fiscal affairs, particularly in creating tax policies tailored to suit their local economic needs.
Any rate change impacts various states differently
This has impacted fiscal federalism. During the pandemic, this issue became pronounced when economic activity was low and the centre was unable to pay states their GST share.
The GST Council has representation from all states. Though needed, this also makes rate rationalisation very challenging, as any rate change impacts various states differently. For instance, when a proposal came up to increase GST on readymade garments above Rs1,000 (US$12) from 12% to 18%, the finance minister of West Bengal objected to it on the pretext that the state’s thriving market should not be disrupted. Since tax mop-ups have been increasing at healthy rates, most Indian states prefer a status quo.
But there are two sides to rate rationalisation. For MSMEs, it will enhance compliance, reduce litigation and improve ease of doing business. For the government, this could mean a revenue shortfall in the short term, impacting government spending on crucial sectors like infrastructure and social welfare. Moreover, merging slabs may also come with increase in rates for some essential goods and services, thereby fueling inflation.
Fine-tuning
The GST Council’s various groups of ministers (GoMs) look into the impact of rate rationalisation and GST on issues such as health and life insurance premiums. The 18% GST on insurance premiums has been termed an ‘anti-people tax’, and there is a demand to lower or remove it.
Recent meetings of the GoMs to review the rates on health insurance premiums and more than 100 other items, including agricultural goods, fertilisers and educational materials, saw no decisions being taken. Discussions have been deferred to the next meeting. The GoM on insurance is in the process of finalising its recommendations, which will then be taken up by the GST Council. There is no clear timeline on when a decision will be taken.
Like any intricate machinery, GST rates require ‘regular fine-tuning to function optimally’, says Rastogi. In today’s rapidly evolving business landscape, businesses need a tax system that can adapt swiftly to change. While agility is important, so is arriving at a consensus. Until that balance is reached, compliance won’t be easy.
