The turbulent years of implementation VAT (VAT) in India seem to be over. This indirect and transaction-based tax, introduced nationwide in July 2017, is well established. Most initial problems, such as The controversial issue of states not receiving their constitutionally required compensation during the Covid peak period has also been resolved.

At last month’s GST Council meeting, the Indian government said it would settle the outstanding balance to the states – Rs 16,982 billion for June 2022, the final tranche – soon, although the compensation fund was empty. GST surveys are back on track. Revenue, which rose last month – Rs 1,49,577 crore – jumped 12% yoy. For the period April-February of the current fiscal year, the monthly GST collection didn’t even slip below Rs 1.4 billion, a significant threshold considering it plummeted to a paltry Rs 32,172 crore in lockdown-hit April 2020 before recovering to 1 lakh crore in October after six months .

As GST collection becomes robust – a result of tax base broadening and closing of leaks – this is the right time to embark on the next phase of India’s most ambitious tax reform. So what kind of reforms should be part of GST 2.0?

Pratik Jain, tax partner at Price Waterhouse & Co, says that “rate rationalization (reducing the current four tax rates from 5%, 12%, 18% and 28% to just three) and bringing petroleum products within the scope of the GST rate structure ‘ should be prioritized to take reform to the next level. If consensus on passenger fuels would take more time, the GST Council should start to include aviation turbine fuel (ATF) and natural gas, he says. Now petroleum products and select items such as electricity and alcohol are kept outside the scope of GST.

According to Jain, two areas require the council’s immediate attention – the formation of a GST Court of Appeal and closer coordination between central and state GST agencies for testing. The Council, co-chaired by the Union Treasury Minister and their state counterparts, is the supreme decision-making body on indirect taxation in India. The Council, for its part, has started work on new reform measures. Its 49th session, held in New Delhi last month, dealt with the issue of establishing an appeals court. It adopted the report of a group of ministers with some modifications. “Final draft amendments to the GST Laws will be circulated to Members for comment. The Chair has been authorized to complete the same,” read the official statement released after the meeting.

According to EY India tax partner Saurabh Agarwal, the GST Court of Appeal could be headquartered in Delhi with regional benches in Mumbai, Kolkata, Chennai, Bengaluru, Ahmedabad, Prayagraj, Chandigarh and Hyderabad as “it may not be possible to have it in India to set up all states in the initial stages”.

According to a recent report by the Press Trust of India, which quotes an unnamed official, each state is to set up a four-person appeals court with two technical members (one from the center and one from each state) and two legal members. Establishing an appellate court will reduce court cases and reduce litigation costs for litigants.

“From a short to medium term perspective, the next stage of GST reforms should aim to resolve disputes early and reduce ongoing litigation,” says Vikas Vasal, National Managing Partner – Tax, Grant Thornton Bharat.

“The focus should be on the establishment of courts of appeal, the introduction of faceless assessments similar to those in the income tax system, and an amnesty system to settle existing disputes, many of which arose from problems of interpretation or minor breaches during the early years of the GST,” he says and adds that the long-term focus should be on expanding the scope of the GST and bringing all goods and services within its scope.

However, Sushil Modi, a former Bihar Deputy Prime Minister and politician who headed the empowered GST committee prior to the introduction of the tax system, argues that the GST no longer needs any more big-bang reforms. “What it takes is a little fine-tuning. With good sales growth and inflation under control, this is the right time to start reducing the number GST plates to three. There should be one record between 12% and 18% and another between 5% and 12%,” he says, adding that the highest record (28%) should remain as it is.

An EY report, GST Transformation: The Road Ahead, published last year, proposes tariff rationalization based on the following formula: “Move to a three-tier tariff structure of 8 (benefit rate), 15 (standard rate), 30 (negative rate). rate) per cent by merging 12 per cent and 18 per cent into 15 per cent plates and increasing the error rate to 30 per cent from the current 28 per cent.” The report also states that the 30 per cent plate will rise to 40 per cent after the compensation levy is abolished can be raised.

The GST, which included 17 major taxes and 13 levies, has four panels plus an exemption list (eggs, cottage cheese, vegetables, etc. are not taxed). Luxury and sin items are subject to the maximum tax of 28%. Items such as tobacco, carbonated water, caffeinated beverages and some motor vehicles are subject to an additional levy above the 28% tax plate to fund the equalization body needed to assist states that have failed to comply with GST eliminate an annual growth of 14% and more. The compensation was only intended for the transitional period between July 2017 and June 2022.

NO COMPENSATION BUT CESS CONTINUES
While states are no longer receiving compensation, tax collection continues and will continue through March 2026. Collection of the levy has been extended to fill the revenue gap resulting from the pandemic as the center resorted to loans (Rs 1.1 lakh crore in 2020). -21 and Rs 1.59 lakh crore in 2021-22). The cess varies from item to item – for example, Pan Masala attracts a 60% Cess and Pan Masala, which contains tobacco, attracts a whopping 204% Cess.

According to an RBI government finance report released in January, the top 10 recipients of GST compensation payments during the five-year transition period were Maharashtra, Karnataka, Gujarat, Tamil Nadu, Punjab, Uttar Pradesh, Delhi, Kerala, West Bengal and Madhya Pradesh. The report states that the states and union territories likely to be hit hardest following the withdrawal of compensation are Puducherry, Punjab, Delhi, Himachal Pradesh, Goa and Uttarakhand, in that order, as measured by the share of GST compensation in their tax revenue averaged 10% or more.

However, after analyzing the sales figures for a 10-month period from April to January of FY22 and FY23, Jain comes to a different conclusion: “Uttarakhand, Himachal Pradesh, Karnataka and Gujarat were able to maintain a growth rate of more than 14% despite the discontinuation of the GST -Compensation. States like Delhi, Uttar Pradesh and West Bengal appear to be the hardest hit by the suspension of compensation.”

The very concept of compensation was woven into the GST regime to produce recalcitrant states like Maharashtra and Gujarat. Some of these producing countries used to enjoy higher revenues due to the origin-based tax regime that was in place prior to the GST. Once compensation is gone, how will states adapt to the new regime and reform to generate solid revenues? Finally, from Day 1, it was clear that the GST indemnity was only a temporary measure.

“Ultimately, states must become self-sustaining. To increase revenue, states should try to plug tax leaks and monitor compliance more closely,” says Jain.

Economist and former India’s chief statistician, Pronab Sen, adds that the losses to states from the withdrawal of GST remuneration is something that “needs to be examined by the Finance Commission”. A number of new reforms need to be initiated to make the GST simple and seamless.

However, Deloitte India’s tax partner MS Mani argues that it is important to stabilize the GST with minimal changes throughout the year, as any change requires a change in IT systems, product pricing, business plans, etc. “It would be good if all changes discussed and approved during a fiscal year were rolled out from April 1 of the next fiscal year to give companies time to prepare and be prepared for them,” he says.

Perhaps a number of changes could be consolidated and rolled out in one fell swoop. GST 2.0 is essential but should be rolled out with minimal disruption.