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India GST reform proposal near completion

Higher recent tax take gives green light for simplification of GST

With India’s Goods and Services Tax fast approaching its July 2022 fifth anniversary, draft proposals are being drawn up for review by the supervising GST Council. These would aim to reduce the number of GST rates; tackle the allocation of revenues with the states; and cut the number of exemptions.

3 major issues for India GST reforms:

  1. Reduced from current four main rates (5%, 12%, 18% and 28%) down to three. It is probable that the 5% and 12% rates will be consolidated.
  2. As the current 5-year state revenue sharing arrangements are due to sunset, consideration for further sharing.
  3. Reducing the number of exempt supplies to help fund point 2. and lower than expected effective GST rate. There are currently 150 and 80 exempted goods and services, respectively.

With relatively buoyant revenues since the COVID-19 crisis abatement, now is seen as good timing to reform GST. A group of ministers (GoM) headed by the Karnataka chief minister is likely to meet soon to finalise its recommendations that could be taken up at the next GST Council meeting.

Other exemption and compliance reforms required

In addition to the above three pressing reform areas, a number of simplifications and extensions of the tax net are desirable, too:

  • Make GST registration process less burdensome
  • There are too many exemptions, meaning less revenues and more distortion. Many key supplies, including petroleum, real estate and electricity are exempted. A petrol GST proposal will be considered in September 2021.
  • Reporting and remittance deadlines are repeatedly extended due to economic and admirative issues. This encourages non-compliance and fraud. More resolve in holding to deadlines is needed to bring certainty
  • The GSTN needs to do more to encourage the adoption of technology to improve collection efficiency and reducing tax evasion. Too many smaller taxpayers are manual.
  • Centre has been slow recently on paying 5-year compensation (see below), undermining talks with the states

2017 GST one country, one tax

India consolidated a range of confusing and overlapping indirect taxes with its 2017 GST implementation.  Since then, it has layered on the e-Way bill reporting and the new Indian e-invoicing regime completed earlier this year.

  • 2021: e-invoice rollout for B2B and B2C completed
  • 2019: integrated GST refunds system
  • 2019: GST threshold raised to 40 lakhs
  • 2018: India e-way bills introduced
  • 2017: sales and purchase reconciliation suspended (GSTR-2 and 3 suspended)
  • 2017: GST launched

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