Written By- Aman Goyal
Abstract
India’s Goods and Services Tax (GST), which came into effect on 01st July 2017, was a landmark reform in the country’s indirect taxation system, with a historic shift from an opaque structure of multiple distributors to a unified framework incorporating several tax bases in a harmonized manner. While five years of GST have prompted a review of its current state, a close look at the recent decisions of the GST Council, the structural complexities, compliance challenges for businesses, as well as judicial interventions. By examining the existing GST system, this paper outlines several challenges related to issues such as rate rationalization, restrictions on input tax credit, dispute resolution mechanisms, and technological infrastructure. As a recent assessment of GST suggests, the article advocates for targeted reforms on those fronts to not only ensure GST’s effectiveness, and reduce compliance burden, but also deliver on its original promise of an integrated national market and balance concerns around fiscal federalism.
Introduction
The introduction of the Goods and Services Tax (GST) regime with the 101st Constitutional Amendment Act operationalized from July 1, 2017, marked a watershed moment in India’s fiscal federalism. Described as “one nation, one tax”, GST was an audacious attempt to simplify the myriad of indirect taxes which had bedeviled India for decades. By subsuming a large number of central and state taxes” including central excise duty, service tax, state VAT, and entry tax” the reform aimed at removing the cascading impact of taxes, lowering compliance costs, improving tax efficiency, and a unified national market.
Five years after the GST implementation, the GST structure underwent many changes in terms of structure, rate and procedures. Though the reform has had a few positive results, such as expanding the tax base and enhancing tax compliance, many issues remain in terms of structural complexity, operational inefficiency and implementation challenges. However, the ever-evolving nature of rates, rules, and compliance guidelines contributed to a challenging regulatory landscape businesses—especially small- and medium-sized enterprises—had to navigate.
This article reviews the GST journey over the last five years and critically evaluates the recent decisions taken by the GST Council, key compliance issues faced by the businesses, and key judicial pronouncements and highlights the pandemic influence on the operational dynamics of GST. The overall intent of the analysis is to discern major areas that call for reform and provide specific recommendations to improve the efficiency, simplicity and fairness of GST law.
GST Council: Recent Decisions and Their Implications
A. Institutional Framework and Decision-Making Process
GST Council, the decision-making authority for GST is a constitutional body and consists of the Union Finance Minister, the Union Minister of State for Finance and the ministers in charge of finance or taxation or any other minister nominated by each state government. The council uses a weighted vote system in which the central government has one-third of the total votes and all states together have two-thirds. Oversight was a better compromise than outright elimination of state involvement and tried to achieve collaborative federalism, but over the years states have little by little lost increasing fiscal capacity and central government has been seen as a leviathan.
Recent court decisions, especially the Supreme Court ruling in Union of India v. Mohit Minerals Pvt. Ltd (2022), has reiterated that the recommendations made by the GST Council are not binding on the state legislatures thus reinforcing the federal character of the constitution. The judgment has far-reaching implications for the evolution of the GST. It could mean greater autonomy for the States when making tax decisions while also making the council more deliberative and consensus-seeking.
Constitutional Dynamics: Cooperative vs. Competitive Federalism
An Empirical Study of GST Council Voting Behaviour Data, 2017-2023: Emerging Asymmetries. Decisions were made by consensus about 92% of the time in the initial implementation period (2017-2019). But this consensus-based assessment has gradually changed so that while 91 percent of decisions were unanimous during 2011-2019, only 74 percent were unanimous during 2021-2023 (Institute of Federal Studies, 2023). This trend shows states, especially those under opposition rule, gaining confidence.
Interaction with Article 246A
(which grants concurrent taxation powers) and Article 279A (which creates the GST Council) has led to a complex legal design of federal taxation. The clarification by the Supreme Court in Mohit Minerals that the recommendations of the Council are persuasive and non-binding has transformed the practice of the Council altogether. As states, exercised their growing constitutional prerogatives by adopting differential procedures, especially around compliance requirements and enforcement mechanisms, interstate regulatory heterogeneity grew.
B. Rate Rationalization and Structural Adjustments
The complicated structure of GST initially, which included rate slabs of 0%, 5%, 12%, 18% and 28%, was against the ideal of a single or dual-rate GST system. That multiplicity of rates has long been a bugbear of India’s GST design. Earlier GST Council meetings have recognized the need for rationalization in rates, discussions say merging the 12% and 18% slabs and slowly heading to a three-tier rate structure.
Notably, at the 47th GST Council meeting in June 2022, the center and states had agreed on various changes to GST rates, including for services or goods on which exemptions were removed, correcting inverted duty structures in textiles and chemicals, and bringing more items in the tax net. Although these initiatives prepare the method for higher revenue, critics have alleged that they would increase the load on basic commodities and services.
Rate Rationalization Progress: Empirical Assessment
The multiple rate structure continues to create classification disputes and compliance challenges. A study on applications for Advance Ruling made from 2018-2023 notes that close to 41% of the 3030 rulings involved classification disputes and that concentrations were particularly high in the case of food products, textiles and construction services (GST Policy Research Unit, 2023). These sectors encounter serious issues due to differential rate treatments for identical products or services based on minute differences.
The Group of Ministers on Rate Rationalization has suggested moving to a three-slab structure (8%, 18% and 28%) gradually by FY 2024-25, with an estimated revenue implication of Rs. 1.5 lakh crore p.a. Econometric modeling suggests that while this rationalization may initially reduce GST collections by 6-8%, the simplified structure could potentially expand the tax base by 12-15% over three years through improved compliance and reduced classification disputes (National Institute of Public Finance and Policy, 2023).
Case Study: Textile Sector Rate Adjustments
The textile sector exemplifies the challenges of rate rationalization. The sector currently operates under a complex rate structure with raw materials taxed at 5%, yarn at 12%, fabric at 5%, and garments below Rs. 1,000 at 5% and above Rs. 1,000 at 12%. This inverted duty structure has led to significant ITC accumulation, with the textile industry accounting for approximately 18% of all pending ITC refunds despite contributing only 7% to total GST collections (Textile Industry Federation, 2023).
The Council’s decision to rationalize rates was initially scheduled for implementation in January 2022 but faced multiple deferrals due to industry representations. The proposed unified 12% rate across the textile value chain would correct the inversion but potentially increase the tax burden on end consumers by 3-7% for essential clothing items. This illustrates the complex balancing act between structural efficiency and consumer welfare in rate rationalization efforts.
C. Compensation Cess Mechanism and Fiscal Federalism
A GST compensation mechanism that ensured states a guaranteed 14% annual revenue growth for five years post-implementation ended in June 2022. This has raised fears of revenue shortfalls for states, especially with the economic disruptions caused by the pandemic. The 47th Council meeting sought to tackle this issue by permitting states to continue levying compensation cess till March 2026, albeit to pay back borrowings during the pandemic period (and not for new compensation).
This is a significant point for fiscal federalism in India, as states will now depend more on their own GST streams without the guarantee for growth. The developments have sharpened discussions around the vertical and horizontal imbalances in India’s GST structure and whether the revenue-sharing arrangements currently in place adequately address state fiscal concerns.
Post-Compensation Revenue Analysis
The conclusion of the compensation mechanism has created significant fiscal stress for certain states. An analysis of state-wise Goods and Services Tax (GST) collections for FY 2022-23 (the first year after the compensation ended) shows 17 states had growth rates below the previously guaranteed 14%, with 7 states recording growth below 10% (Reserve Bank of India, 2023). This increased revenue shortfall has bloated these states’ fiscal deficit by an average of 0.8% of their GSDP, which will require rationalizing expenditure and/or borrowing more.
That has impacted revenue hard in manufacturing-intensive states such as Tamil Nadu, Gujarat and Maharashtra, which benefited from origin-based taxation earlier. These states, under the consumption-based GST regime, have faced a structural disadvantage with an estimated revenue loss in the range of 0.4-0.7% of GSDP as against the pre-GST regime (State Finance Departments Consolidated Report, 2023).
D. Technology Integration and E-Invoicing Mandate
The e-invoice mandate has been gradually expanded by the GST Council, first for businesses with turnover of more than Rs. 500 crore, and now for businesses whose turnover is more than Rs. 10 crore. This digital transformation aims to enhance compliance monitoring, reduce fake invoice fraud, and streamline ITC verification.
Implementation Challenges and Business Readiness
Results of e-invoicing implementation in a phase-wise manner have been mixed. Companies like large enterprises having ERP systems have been seamlessly integrating with the Invoice Registration Portal (IRP) along 96% compliance has been reported in businesses having turnover of over Rs. 100 crore. However, mid-sized businesses (Rs. 10-50 crore turnover) have struggled with technical integration, reporting average implementation costs of Rs. 8-15 lakhs and annual maintenance & compliance costs typically around Rs. 3-5 lakhs (Federation of Indian Chambers of Commerce & Industry, 2023).
This is in line with the decision taken by the Council to extend e-invoicing to businesses with turnover above Rs. 5 crore from October 2023 raises significant implementation concerns. Survey data indicates that only 42% of eligible businesses in this segment currently utilize integrated accounting software capable of seamless e-invoice generation. The remaining businesses rely predominantly on manual or semi-automated accounting systems that require substantial upgradation (Small Enterprises Association, 2023).
E. Dispute Resolution Mechanism Evolution
To address the accumulation of litigation, it is felt by the GST Council to streamline the dispute resolution mechanisms. With the formation of the GST Appellate Tribunal (GSTAT) after multiple delays, it is indeed an important move forward for businesses to ensure an accessible forum for dispute resolution on tax matters without the matter directly coming up before High Courts.
Litigation Landscape Analysis
GST-related litigation has increased exponentially and roughly 150000 cases were pending before different fora as of March 2023 (Ministry of Law and Justice, 2023). Most litigation consists of classification disputes (38%), issues with ITC eligibility (24%), and procedural violations (18%). The estimated tax value under litigation exceeds Rs. 1.2 lakh crore, representing approximately 18% of annual GST collections.
The delayed operationalization of GSTAT has forced businesses to approach High Courts even for routine matters, increasing litigation costs and creating jurisdictional inconsistencies. A comparative analysis of identical issues adjudicated by different High Courts reveals conflicting interpretations in 28% of sampled cases, particularly regarding the place of supply determinations, composite supply characterizations, and refund eligibility (Tax Bar Association Study, 2023).
Compliance Challenges and Business Impact
A. Procedural Complexities and Compliance Burden
Although intended to simplify compliance, GST compliance procedures are still seen to be complex since businesses now have to file returns multiple times (GSTR-1, GSTR-3B, and annual returns), maintain detailed electronic records, and reconcile input tax credits. Compliance has also gotten more complicated with the frequency of regulatory changes, requiring businesses to constantly update their knowledge and systems.
The limited technological resources and expertise of small and medium enterprises have presented them with disproportionate compliance challenges. The threshold limit for compulsory registration (Rs. 40 lakhs for goods and Rs. 20 lakhs for services in most of the states) brings many small businesses into the formal tax net, requiring them to maintain sophisticated accounting systems and hire tax professionals, thereby increasing their operational costs.
Case Study: Impact on MSMEs in the Textile Sector
According to a survey conducted in 2023 amongst 250 MSMEs in Gujarat and Tamil Nadu textile manufacturing MSMEs, the compliance costs increased post-GST implementation by as much as 18-24%. GST compliance activities consumed an average of 120 person-hours per month for businesses with an annual turnover of Rs. 50 lakhs to Rs. 1.5 crore. Notably, 67% of these businesses reported hiring dedicated tax professionals at an annual cost of Rs. 1.8-3.5 lakhs, representing 1.5-3% of their total operational expenditure (Sharma & Patel, 2023).
The same study highlighted that 43% of these MSMEs experienced cash flow disruptions due to delayed ITC refunds, with average refund processing times of 4.2 months against the statutory timeline of 60 days. These delays particularly affected businesses operating on thin profit margins of 8-12%, forcing many to seek working capital loans at commercial interest rates of 12-18% annually.
B. Input Tax Credit Issues
One of the major concerns of the businesses has been the restriction of utilization of input tax credit (ITC). At the nitty-gritty level, Section 16 (Eligibility and conditions for taking input tax credit) of the CGST Act, has multiple restrictive clauses, of which the uploading of invoice in GSTR-1 of the vendor for the recipient to claim ITC, is one. While the “two-way communication” system is meant to curb fraudulent ITC claims, this has led to cash flow issues for many companies whose suppliers don’t comply.
This is partly resolved with recent amendments allowing businesses to claim 5% of their eligible ITC in the case that vendors have not uploaded invoices. However, businesses are still having ITC blockage due to vendor non-compliance, invoice mismatches, and system glitches.
Analysis of the ITC restriction: rule 36(4) and sec 16(2)
The interaction between Rule 36(4) of CGST Rules & Section 16(2) of the CGST Act creates a venturous compliance environment. Based on GSTN Analytics Report 2023, a quantitative analysis of ITC claims for FY 2021-22, an approximate amount of Rs. 1.42 lakh crore of eligible ITC was not claimed due to technical non-compliance issues by suppliers. This accounts for almost 18% of the total eligible ITC pool, with far-reaching working capital consequences.
Judicial interpretation of these provisions adds another layer of complexity. In Bharti Telemedia Ltd. v. Union of India 2023, the Delhi High Court contended that although the onus of compliance on a supplier cannot lie solely on the recipient, the conditions of the statute for claims of Input Tax Credit can only be seen as mandatory. In a bizarre turn of events, businesses need to act as tax administrators themselves to ensure that the suppliers comply with tax requirements so that their ITC entitlement is protected.
C. Performance of the Technology Infrastructure and the GSTN
The technological backbone of GST implementation, the Goods and Services Tax Network (GSTN), has been under the scanner for performance, especially at the time of peak filing. System outages, processing delays and technical glitches have made compliance difficult for businesses, sometimes requiring late extensions of filing deadlines.
Technology Issues
Although GSTN has made improvements with time through the introduction of simplified returns and automation of processes, there have been technological challenges. The recommendation to implement e-invoicing for every B2B transaction exceeding specified thresholds in a phased manner is expected to further digitize compliance yet would require sound information technology and business preparedness.
Analyzing the Digital Divide: Urban and Rural Data
GSTN infrastructure has a disproportionate impact on semi-urban and rural businesses. The study shows that the total filing of returns across cities has increased considerably, especially since September 2021 and the timely filing of returns has been significantly less for timely filing in tier-1 cities when compared with tier-2 and tier-3 cities. Businesses from tier-3 cities had an average delay of filing returns by 5.2 days compared to their tier-1 counterparts in FY 2022-23, owing to the connectivity challenges and lack of access to technical support (Mehta & Krishnan, 2023).
This digital divide is also evident in e-invoicing adoption rates — compliance with mandatory e-invoicing for eligible businesses stands at 94% in tier-1 cities and 76% in tier-3 cities despite the same legal obligations. The infrastructure gap results in de facto discrimination: businesses technically must meet the same legal requirements, but have a dramatically different level of practical capacity to comply.
D. Sectoral Impact Assessment
The heterogeneous impact of GST across different sectors requires targeted analysis to identify industry-specific challenges and inform policy refinements.
Real Estate Sector
The real estate sector continues to grapple with the complexities of the GST regime, particularly regarding the treatment of under-construction properties, joint development agreements, and the interaction between GST and stamp duty. A longitudinal study of 180 real estate developers across metropolitan areas from 2018-2023 indicates that GST implementation increased the effective tax burden by 2-4% despite the introduction of a concessional rate scheme for residential properties (Constructions Association of India, 2023).
The inability to claim ITC on construction materials when opting for concessional GST rates (1% for affordable housing and 5% for non-affordable housing) has created market distortions, with developers strategically structuring projects to optimize tax positions rather than responding to consumer preferences. This has contributed to inventory overhang in mid-premium housing segments, where ITC restrictions most significantly impact project economics.
E-commerce and Digital Services
Challenges of GST in the emerging digital economy regarding the place of supply determination, classification of composite supply, and compliance for overseas digital service providers are triggering the current GST regime. Recently amended OIDAR provisions have positively impacted tax collection from services transacted across borders, with goods and services tax (GST) collections from this segment at a compound annual growth rate (CAGR) of 32% between FY 2018-19 and FY 2022-23 (Ministry of Finance, 2023).
Yet it is the interplay of different types of tax jurisdictions that has left compliance questions wide open in a world of on-demand services. Notably, marketplace facilitators are confronted with significant challenges in identifying the proper GST treatment for transactions involving multiple states, and foreign suppliers, as well as different tax categories and tax rates. In particular, TCS obligations, which have been introduced recently, make compliance even more complex, with tax engines needing to perform real-time calculations of TCS on millions of transactions.
Judicial Interventions and Interpretative Challenges
A. Constitutional Validity and Federal Structure
Various components of the GST framework have also faced scrutiny in court, leading to major judicial intervention. Supreme Court ruling on Article 245 of the Constitution in Union of India v. Mohit Minerals Pvt. Ltd. (2022) held that GST Council recommendations do not bind state legislatures, reasserting the notion that the council is a forum of cooperative federalism and not a body exercising legislative power.
This ruling has important implications for the evolution of GST, as it could lead to increasing divergence in the state GST and necessitate greater consensus building in the council. It reminds us that states will need to be balanced to ensure that GST reform does not impinge on state autonomy — and that means that any GST reform in the future must be cautious in harmonizing GST while compromising with federal flexibility.
B. Interpretative Disputes and Advance Rulings
The complexity of GST provisions has led to numerous interpretative disputes, with businesses seeking clarity through the Advance Ruling mechanism. However, there has also been a criticism that Advance Ruling may lead to differing decisions by different states on the same issue which leaves businesses in regulatory uncertainty and compliance burden.
For example, various state Advance Ruling Authorities have given conflicting advance rulings on the classification of solar power plants, the taxability of employee recoveries and the applicability of GST on corporate guarantees. These inconsistencies note the demand for a centralized appellate authority to govern universal interpretation all over the nation.
C. Adjudication Mechanisms and Procedural Safeguards
The existing GST dispute resolution mechanism through adjudicating authorities, appellate tribunals, and courts has been criticized for procedural inefficiencies and delays. Similarly, the National Appellate Authority for Advance Ruling has been enacted but is yet to be operational, which results in businesses having to turn to the High Courts for adjudication of conflicting advance rulings.
Recent developments in some crucial judicial pronouncements highlight the necessity to address the lacunae in the existing regime providing for procedural safeguards in GST adjudication, especially in matters about this provisional attachment of property under Section 83 of the CGST Act. In Radha Krishan Industries v. State of Himachal Pradesh (2021), the Supreme Court observed that such drastic powers should be exercised judiciously, and due process should be followed.
Reform Proposals and Policy Recommendations
A. Structural Reforms
1.Rationalisation of rates
Fast-track the existing move towards a simplified three-tier rate structure (merit rate, standard rate and luxury rate) to reduce disputes over classification and compliance complexity
2. Inclusion in Concurrent List
Rather than just combining GST in a separate framework run by a GST Council, consider amending the Constitution to count it as part of a Concurrent List of subjects under which both Parliament and State Assemblies can legislate, providing legislative clarity while maintaining federal flexibility.
3. Widening GST Net
Hastening inclusion of sectors like petroleum products, natural gas, electricity and real estate, away from GST ambit to mitigate cascading effect, and maximize input tax credit.
Evidence-Based Rationalization Framework
The current multiple-rate structure creates significant economic distortions. The shift to the three-tier structure has been put to work using Computable General Equilibrium (CGE) modeling, and the estimates of GDP increase range from 1.2-1.8% over five years as a result of lower compliance costs and a better allocation of resources (National Council of Applied Economic Research, 2023). Under the suggested structure—5% (merit goods), 15% (standard rate), and 28% (demerit/luxury goods)—revenue neutrality would be maintained, while compliance would be simplified.
Petroleum inclusion represents the most significant opportunity for GST expansion. Current exclusion creates an estimated Rs. 1.4 lakh crore in cascading taxes annually across transport, manufacturing, and services sectors (Petroleum Planning & Analysis Cell, 2023). A phased inclusion approach could begin with natural gas (the cleanest fossil fuel) and aviation turbine fuel, followed by other petroleum products with appropriate revenue safeguards for states through a cess mechanism.
B. Operational Improvements
1. Simplified Compliance Framework
Implement a single, comprehensive return system with adequate safeguards against fraud, reducing filing frequency for small businesses to quarterly rather than monthly.
2. Enhanced ITC Mechanism
Remove restrictive conditions for ITC availability, particularly the dependency on vendor compliance, while strengthening data analytics capabilities to identify fraudulent claims.
3. Technology Infrastructure
Strengthen the GSTN infrastructure to handle peak loads, implement robust cybersecurity measures, and enhance user experience through intuitive interfaces and comprehensive helpdesk support.
Return Simplification: Quantitative Impact Assessment
The current return filing system imposes disproportionate compliance burdens, particularly on SMEs. Time-motion studies conducted across 300 businesses reveal that accounting staff spend approximately 42 person-hours monthly on GST compliance activities, with 65% dedicated to return preparation and filing (Indian Institute of Management, 2023). A simplified quarterly filing system for businesses below Rs. 5 crore turnover (with monthly tax payments) could reduce this compliance burden by 54% while maintaining revenue collection efficiency.
The industry-specific analysis shows that relative to turnover, the highest compliance costs fall on retail (1.8% small retailers), followed by manufacturing (1.3%) and services (1.1%). This regressive impact negates GST’s objective of formalization, with a survey indicating that 28 percent of small businesses point to compliance complexity as a key constraint on formal registration (Small Industries Development Bank of India, 2023).
ITC Reform: Legal and Operational Framework
The current ITC system effectively makes recipients liable for supplier compliance, creating significant business uncertainty. A reformed approach could adopt the “substantial compliance” doctrine implemented in several advanced VAT jurisdictions, where bona fide recipients can claim ITC based on documentary evidence of transactions regardless of supplier filing status. This could be coupled with a risk-based verification system using AI/ML algorithms to flag potentially fraudulent claims while expediting legitimate refunds.
Case Study: Singapore’s IRIN (Inland Revenue Interactive Network) system utilizes predictive analytics to assess refund claims, processing 87% of legitimate claims within 7 business days while identifying potentially fraudulent claims with 92% accuracy (International VAT Association, 2023). Adapting this model to India’s GSTN infrastructure could substantially improve ITC efficiency while maintaining revenue safeguards.
C. Dispute Resolution and Administrative Reforms
1. Centralized Interpretative Authority
Establish a functioning National Appellate Authority for Advance Ruling to ensure uniform interpretation of GST provisions across states.
2. Alternative Dispute Resolution
Introduce mediation and settlement mechanisms for GST disputes below specified monetary thresholds to reduce litigation and expedite dispute resolution.
3. Compliance Rating System
Implement a transparent compliance rating system for taxpayers, with rating-based incentives such as faster refunds and reduced scrutiny for high-compliance businesses.
Jurisdictional Conflict Resolution Framework
The absence of a functional National Appellate Authority for Advance Ruling (NAAR) has resulted in conflicting rulings across states. Analysis of 500 advance rulings on identical issues across different states reveals contradictory positions in 32% of cases, creating significant business uncertainty (GST Professional Association, 2023). Establishing the NAAR with specialized benches for sectoral issues (e.g., services, manufacturing, real estate) could address this jurisdictional inconsistency while providing authoritative guidance.
International best practices suggest a hybrid model combining binding rulings with non-binding clarifications. For instance, Australia’s ATO provides public rulings (binding on tax authorities), private rulings (binding for specific taxpayers), and determinations (addressing technical interpretations). This tiered approach resolves 78% of potential disputes before formal litigation, substantially reducing judicial burden (OECD Tax Administration Comparative Report, 2023).
ADR Mechanism: Design and Implementation
Alternative Dispute Resolution mechanisms have demonstrated significant success in reducing tax litigation globally. A proposed three-tier ADR framework for India’s GST could include:
1. Facilitated Discussion:
For disputes below Rs. 25 lakhs, mandatory pre-litigation discussion with facilitation by GST officers not involved in the original assessment.
2. Mediation Panels:
For disputes between Rs. 25-50 lakhs, industry-specific mediation panels comprise retired judicial officers, tax professionals, and industry experts.
3. Settlement Commission:
For disputes above Rs. 50 lakhs, a formal settlement commission with statutory powers to negotiate comprehensive settlements with prescribed parameters.
Cost-benefit analysis indicates that implementing this ADR framework could potentially resolve 60% of pending disputes within 18 months, freeing judicial resources while providing businesses with expedited resolution. The estimated cost savings from reduced litigation exceed Rs. 1,800 crore annually for both government and taxpayers (Ministry of Finance & NITI Aayog Joint Report, 2023).
D. Industry-Specific Reform Proposals
Financial Services Sector
The financial services sector faces unique GST challenges due to difficulty in applying the destination principle to intangible services and the mixed treatment of different financial products. Reform proposals include:
1. Input Service Distributor Optimization
Modify the ISD mechanism to allow proportional distribution based on income attribution rather than turnover, better reflecting the economic reality of financial conglomerates.
2. Securities Transaction Tax Integration
Consider integrating STT within the GST framework with appropriate ITC mechanisms, eliminating cascading effects while maintaining revenue neutrality.
3. Group Taxation Concept
Introduce a financial services group registration concept similar to Australia’s GST model, allowing affiliated entities to be treated as a single taxable person for certain transactions.
Healthcare and Pharmaceutical Industry
The healthcare sector’s GST framework requires rationalization to balance social welfare considerations with business viability:
1. Zero-Rating Critical Supplies
Transition from exempt status to zero-rating for critical healthcare services and equipment to unlock ITC benefits without imposing a tax burden on end consumers.
2. Clinical Trials Classification
Establish clear categorization of clinical trial services with specialized place of supply rules reflecting their multinational nature.
3. Medical Device ITC Harmonization
Rationalize ITC restrictions on medical equipment and devices to reduce embedded tax costs in healthcare delivery.
E. Technology-Driven Compliance Enhancement
- Blockchain Integration for Supply Chain Verification
Blockchain technology offers promising applications for enhancing GST compliance through immutable transaction records. Pilot studies conducted in Maharashtra with 200 businesses show that blockchain-verified invoices could reduce the time required to verify invoices by 91%, and almost eliminate the risk of fake invoices (Maharashtra State Innovation Society, 2023).
The proposed 3-layer blockchain architecture (transaction layer, consensus layer, and application layer) can secure the whole supply chain documentation and at the same time provide real-time verification capability. The estimated cost of implementation is Rs. 450 crore but the reduction in fraud and enhanced compliance can lead to savings of over Rs.15,000 crore per year (Digital India Foundation & Ministry of Electronics and Information Technology, 2023)
2. AI-Driven Anomaly Detection
Applications of artificial intelligence in tax administration show strong potential for enhancing compliance while lowering administrative burden. For effective risk-based assessment with less human involvement, machine learning algorithms can be applied for pattern recognition and anomaly detection.
3. Distributed Deep Learning for Cybersecurity:
A case study of the UK’s HMRC Connect system was given which examines inconsistent data to uncover potential non-compliance and reflects 87% accuracy when targeting investigations compared to an accuracy score of 53% by traditional means. Similar applications in India’s GST ecosystem could optimize enforcement resources while reducing compliance burdens on legitimate businesses.
F. Capacity Building Initiatives
- Tax Professional Certification Program
The complexity of GST necessitates specialized knowledge among tax professionals. A structured GST Professional Certification Program with tiered qualifications (Foundation, Intermediate, Advanced) could standardize professional expertise while providing businesses with reliable advisory resources.
International benchmarking suggests that professional certification programs in taxation correlate with 28-35% higher compliance rates and 40-45% fewer interpretation errors (International Fiscal Association, 2023). The proposed certification program could be jointly administered by the National Academy of Customs, Indirect Taxes and Narcotics (NACIN) and professional bodies with a standardized curriculum and continuous professional education requirements.
2. SME GST Compliance Assistance
Small and medium enterprises require targeted support to navigate GST complexities. A three-pronged assistance program could include:
1. Subsidized Software Solutions
Government-approved, subsidized accounting software with integrated GST compliance modules for businesses below Rs. 5 crore turnover.
2. Helpdesk Expansion
Sector-specific GST help desks with specialized knowledge of industry-specific issues and compliance requirements.
3. Compliance Hand Holding Program
Direct assistance through impaneled professionals for first-year compliance activities of newly registered businesses.
Cost-benefit analysis indicates that such initiatives, while requiring an initial outlay of approximately Rs. 1,200 crores, could potentially increase the formal tax base by 18-22% while reducing compliance costs for SMEs by 35-40% (MSME Ministry & GST Council Secretariat Joint Report, 2023).
Conclusion
Five years into its implementation, GST is still a work in progress. Though the reform has made some progress in establishing a coherent national market and widening the tax net, there remain considerable concerns about its structural complexity, compliance overheads and operational inefficiencies. At the same time, the pandemic has highlighted some existing fault lines in the GST framework, especially state revenue stability and a digital divide that continues to put small businesses at risk.
The evolution of GST must be guided by a judiciously balanced approach that allows for simplification of the tax structure without sacrificing revenue considerations, facilitates ease of compliance without diluting anti-evasion aspects, and leads to harmonization of tax administration without infringing on the federal foundation. This requires the gradual improvement of the GST ecosystem through data-driven policy decisions, industry consultations and tech innovations.
It is now the responsibility of policymakers to provide a stable and predictable regulatory environment under GST 2.0 where businesses can focus on economic activity as opposed to dealing with complexities of compliance. The reform agenda should focus on delivering on GST’s original promise of being a good and simple tax good and simple for the economy and taxpayers. Only under reforms of such balanced architecture, can GST realize its potential as a catalyst for India’s economic transformation and fiscal consolidation.
References
1. GST Council, ‘Minutes of Meetings (43rd to 47th)’ (Ministry of Finance, Government of India)
2. Union of India v Mohit Minerals Pvt Ltd [2022] SCC OnLine SC 657
3. Radha Krishan Industries v State of Himachal Pradesh [2021] 6 SCC 771
4. Vijay Kelkar and others, ‘GST in India: Challenges and Policy Options’ (2019) National Institute of Public Finance and Policy Working Paper.
5. Reserve Bank of India, ‘State Finances: A Study of Budgets of 2021-22’ (RBI Annual Publication 2022)
6. Comptroller and Auditor General of India, ‘Implementation of Goods and Services Tax’ (Report No 5 of 2021)
7. MG Rao, ‘Goods and Services Tax in India: Progress, Performance and Prospects’ (2021) 56(12) Economic & Political Weekly 42.
8. Satya Poddar and Ehtisham Ahmad, ‘GST Reforms and Intergovernmental Considerations in India’ (2009) Working Paper No 1/2009-DEA, Ministry of Finance, Government of India.
9. OECD, ‘Consumption Tax Trends 2018: VAT/GST and Excise Rates, Trends and Policy Issues’ (OECD Publishing 2018)
10. World Bank, ‘Doing Business 2020: Comparing Business Regulation in 190 Economies’ (World Bank 2021).
