GST Development: Examination of Changes, Obstacles, and Future Directions - A Viewpoint from Legal Aspects
In its eighth year, the Goods and Services Tax (GST) in India has brought significant reform by simplifying taxation and harmonizing indirect tax across states. However, the implementation has not been without its challenges and controversies.
One of the ongoing issues is the denial of Input Tax Credit (ITC) to buyers when sellers fail to file returns or pay taxes, even when buyers have valid invoices, bank statements, and transportation evidence. This situation often results in double taxation scenarios and increases business costs and liquidity problems for traders.
Another critical pain point is the liquidity constraints caused by ITC, which can only be offset against tax liability. Surplus ITC is locked with the government, forcing businesses to take loans for operations, thereby increasing financial burdens.
Ambiguities in GST laws and arbitrary enforcement by some officers have led to harassment and a rise in litigation. Pending disputes have surged from 10,000 cases in 2021-22 to 22,000 cases in 2023-24, with blocked amounts rising from ₹3.67 lakh crore to ₹7.40 lakh crore, severely affecting MSMEs' working capital and operational liquidity.
Delays in GST Council meetings due to busy legislative schedules and incompletion of Group of Ministers reports have caused uncertainty around rate rationalization, compensation cess, classification anomalies, and refund issues. The lack of clear communication regarding delays further complicates compliance planning.
Despite these challenges, GST 2.0 is poised to tackle these issues. The proposed framework aims to create a faster and fairer adjudication framework to reduce the backlog of cases and release blocked working capital, crucially supporting MSMEs and overall business liquidity.
GST 2.0 also plans to address classification anomalies and simplify the rate structure to reduce disputes and compliance complexity. Revising ITC rules can prevent the loss of credit due to seller non-compliance and reduce harassment of legitimate buyers.
Enhanced transparency and governance, regular and timely GST Council meetings with clear communication about agendas and decisions, and audit and compliance streamlining are other key aspects of GST 2.0. Measures to unlock working capital and liberalize export-related GST provisions will help businesses thrive in a competitive global market.
In conclusion, while GST has made Indian taxation simpler and more unified, GST 2.0 is poised to tackle the critical pain points—dispute resolution, ITC issues, policy clarity, and implementation challenges—to create a more robust, efficient, and business-friendly tax ecosystem. Addressing these will be key to sustaining GST's long-term success and economic growth in India.
The digital transition under GST is still a work in progress, with system-generated notices, manual enforcement, and transit detentions due to minor clerical errors. Marketing schemes and discounts have led to tax demands due to rigid procedural requirements, causing ongoing compliance stress. Sector-specific disputes include ongoing litigation on the taxability of online gaming, extra-neutral alcohol (ENA), renewable energy projects, and real estate transactions.
A centralized structure with judicial members and uniform applicability for the AAR system can ensure consistency. Faster Dispute Resolution, a centralized, time-bound system for the GST Appellate Tribunal, is crucial to reduce litigation and offer certainty to businesses.
Rate simplification is required to address concerns over high GST rates, multiple rate bands, and frequent classification disputes. Rationalisation and a refund mechanism can provide relief from significant working capital blockages in sectors like renewables, e-commerce, start-ups, and electronics.
Curbing over-aggressive enforcement requires clearer protocols and oversight to ensure fair treatment for taxpayers during investigations. CFOs and tax heads have become key drivers of business strategy due to the implementation of GST.
A harmonized yet cooperative federal model is needed to strike the right balance between preserving the fiscal autonomy of States and ensuring seamless, uniform tax administration across the country. The current restrictions on Input Tax Credit (ITC) in sectors like real estate, logistics, and services require re-evaluation to preserve the value-added nature of GST.
In the words of Darshan Bora, a Partner, and Teesta Banerjee, a Principal Associate at Economic Laws Practice, "GST 2.0 is the need of the hour to address the growing need for simplicity, transparency, and efficiency in GST administration." The journey towards GST 2.0 promises to be a significant step towards a more robust and business-friendly tax ecosystem in India.
- The ongoing issue in the finance sector related to the denial of Input Tax Credit (ITC) can lead to double taxation scenarios, increased business costs, and liquidity problems for traders.
- Faster Dispute Resolution in the business sphere is crucial to reduce litigation, offering certainty to businesses, and a centralized, time-bound system for the GST Appellate Tribunal can ensure consistency.
