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GST: Tamil Nadu treads rocky road to reform
The biggest tax reform in India post Independence threw up a new set of challenges, both for the Industry and state governments.
DTNext looks at how Tamil Nadu rose to the occasion, vis-a-vis GST adoption and revenue collection.
It’s been a bumpy ride for India Inc after the much-talked about single tax reform, the Goods and Services Tax or GST came into effect two years ago on July 1, 2017. Finance Minister Arun Jaitley, the key architect of rolling out this nation-wide reform, was vocal about the Centre’s focus to evolve the tax structure towards a single rate.
“We are working towards a single national sales tax rate which could be a mid-point between 12 and 18 per cent,” he had said recently, indicating the intent to simplify the tax structure. The Centre set the range for GST from 28 per cent to 5 per cent on most items when the signature reform was introduced on July 1, 2017. “Multiple slabs were fixed transiently to ensure the tax of no commodity goes up radically. This contained the inflation impact,” Jaitley had said.
Even prior to the introduction, states like Tamil Nadu had felt that it would lose out. In 2016, A Sarvar Allam, the then Additional Commissioner, Commercial Tax, TN, had written “The proposed GST Bill will mean that states like Tamil Nadu, which have manufacturing industries, will lose out on own tax revenue collections. Instead of focussing only on indirect taxation reform, the Centre must also consider sharing direct tax administration with states, which has been the practice in other federal arrangements internationally.”
Since then, the GST has come a long way. Many concerns have been addressed though there are several aspects still to be ironed out. An official said, “The GST is structured to financially uplift the slowing services industry. But, it has added many complex compliance layers to IT companies/SEZs. Some software services which were charged 15 per cent under Sales Tax (ST) are now charged 18 per cent, thereby adding to the cost.”
The high point is that all taxes used in inputs towards exports are refunded. “Back office services have enjoyed this benefit even under ST regime. Accumulated ITC (input tax credit) can be claimed refund either by execution of ‘Bond or LUT’ i.e. without payment of IGST – Refund Method (or) on payment of IGST adjusting ITC – Rebate Method,” the official sought to point out. Hurdles aside, GST removed various redundancies and discrepancies that were prevalent in previous tax structure. Policies like defined tax categorisation of software, unified tax structure, exemption and refunds turned out to be a boon for service providers and GICs.
Industry insiders cite the instance of the hurdles in export refund mechanism that was highlighted to the commerce and industry ministry last year. “But no headway has been made as yet in this regard,” says an industry veteran, who shared the concern.
Some of the other challenges include systemic issues pertaining to bill of entry, precise bifurcation of export or domestic and other documentation process. Such an experience in the first phase led the exporters to get into training mode in the H2, 2018. “The GST audit certification, applicable to those with a turnover of Rs 2 crore has hit the industry badly. CII had appealed to raise the upper limit for this slab to Rs 25 crore in August last year,” noted A Venkataraman, Convenor, TN Economic Affairs and Taxation Panel.
A host of issues faced by the small and medium enterprises include service sectors charging 18 per cent GST, working capital impacted on account of customers availing credit for longer durations. CII, in Q3 of last year, made a representation to bring the GST in service sector to 5 per cent, he added.
An overview of how Tamil Nadu fared in GST
- The revenue from commercial taxes has been estimated at Rs 84,365.91 cr in the revised estimates of 2018-19 and at Rs 96,177.14 cr in the budget estimates 2019-2020
- Receipts from the Commercial Taxes are estimated to be Rs 96,177 cr in budget estimates of 2019-2020
- The State’s Own Tax Revenue (SOTR) is estimated to be Rs 1,10,178.43 cr in the revised estimates 2018-19
CONTRIBUTION AS PER COMMERCIAL TAXES DEPT
- Favourable climate for TN’s economic growth is set to enhance its own tax revenues. Introduction of GST initially underwent difficulties in implementation but later achieved momentum
- SOTR is estimated to increase to Rs 1,24,813.06 cr in the budget estimates for 2019-2020. Growth rates of 13.12 pc and 13 pc are assumed for the years 2020-21 and 2021-22
- Excise duty collection in Tamil Nadu is expected to grow at the rate of 8 per cent in the year 2019-2020 over revised estimates from the year 2018-19
- Tamil Nadu is one of the States that has been proactively dealing with the various representations received from the stakeholders, including trade and industry, for reviewing the GST rate structure. As a result, the rationalisation of tax rates is being carried out over a period of time
- Based on the present trend in State Excise Duty collection, an amount of Rs 6,724 cr has been included in the revised estimates 2018-19 and Rs 7,262.33 cr is being included in the budget estimates 2019-2020
- National GST Collections thrice breached the Rs 1 lakh cr mark: in April and Oct 2018 and Jan 2019. TN is second state where SGST collections swelled – manufacturing being the key driver
- 5% slab covers household necessities like edible oil, sugar, spices, tea, and coffee (except instant), coal, Indian sweets like Mishti, as well as life-saving drugs
- 18% slab includes hair oil, toothpaste and soaps, capital goods and industrial intermediaries
- 28% slab covers luxury items: cars, consumer durables, AC, fridges, aerated drinks and high-end motorcycles
- 12% slab includes computers and processed food
- As part of the implementation of GST, all the dealers registered under the Tamil Nadu Value Added Tax Act have been migrated to the GST portal (www.gst.gov.in), to avail the e-services provided through the portal
To ensure single interface under GST regime, the State Level Committee has assigned the taxpayers registered in the State of Tamil Nadu in the following manner
No of Taxpayers allotted to Centre 94,184
No of Taxpayers allotted to State4,95,567
KEY CHALLENGES IN TN
- While industries are investing in the state, new industries are yet to demonstrate their interest in this part of the country to pitch in their presence
- Export refund mechanism: Not proper – last year, CII has taken up the matter with the Centre but no headway made yet in this regard. Bill of entry, precise bifurcation of export or domestic and
- other documentation process have been perceived as system challenges for the exporters; they have been forced into learning mode in the second half of last year
- GST audit certification: Required by those with Rs 2 crore turnover, which affected the industry. CII appealed to change this to Rs 25 crore slab in August last year, but no progress on this front as yet
- Service sectors: Charging 18 per cent GST has impacted small and medium enterprises, especially sub contractors; working capital affected on account of customers availing credit for longer durations, whereas the contractors have to submit GST within a month of servicing the customer; in Q3 of last year, representation was made to bring the GST in service sector to 5 per cent
- Inverted duty structure: Imports having to pay higher duty and also rising output duty have not been able to offset the difference – especially by the pump sector – refund in GST regime has not taken into consideration the opening balance; whatever has been carried forward has not been refunded; Pump industries in TN are predominantly from the MSME sector and lots of employment and livelihood particularly in the western part of TN are depending upon this industry. Taxing at 28% will discourage the industry and this industry will be critically affected