In this article, we shall discuss some of the glaring issues that lie ahead of this administration in implementing the GST regime

The GST system has an impact on the indirect tax system of the country. GST is introduced for the improvement of the tax system, but there are still some areas that need to be worked upon so that this tax system does not have a negative impact in the long run. The problems of Implementation of GST is meant to streamline the country’s indirect tax system by merging its many central and state taxes. Even though this new tax system has been acknowledged as beneficial and advantageous in many ways, there are still some concerns regarding its successful implementation. If the implementation of GST issues are not handled well, this new tax reform can have long-term effects on our economy.

Benefits Of GST

The benefits of this tax reform are undeniable: it will help to bring India’s informal sector into the fold, increase exports, lower business costs across most sectors and reduce incidences of unnecessary double taxation. Nevertheless, there are certain issues that are related to the implementation of the tax system, among them are —ambiguity of the anti-profiteering clause, the problematic input tax credit issues, and the uncertainty related to the functionality of the GST information technology system. These challenges can result in the sinking of a promising policy endeavour.

Issues In Implementing GST

The main problems of Implementation of GST that could impede the GST centres on the documentation requirements for the Input Tax Credits and the stage at which the said credit accumulates. The main objective of any value added tax system (like the GST) is the prevention of double taxation. This is done by providing credits at every step of the production chain, efficiently taxing only the extent of the value that has been added.

Discover the GST rates in India, HSN code, or SAC code for all goods and services by using our GST rate finder service. This finder service is also known as the HSN code finder. For products and services, GST is calculated on the basis of an item’s HSN or SAC code.

The issue that arises under the Indian GST, however, is the arduous documentation requirement which may have a number of inadvertent consequences. Under Section 16 (11) of the Model GST Law, an input tax credit can only be received when:

• The buyer received a tax invoice from the supplier.
• The buyer has received goods/services.
• The taxes charged on purchase have been deposited/paid by the supplier.
• The supplier has filed GST Returns.
• Cash flow issues.

The issue that arises with Section 16 (11) is that it puts the administrative load linked with the tax on the buyer instead of the supplier, this can be challenging for businesses. One possible issue that could come up as a result of this administrative shift is the non-payment of taxes by the supplier. In such a scenario, the buyer will end up having to pay for not only his share of the tax but also for the supplier’s share as well. Moreover, problems could come up, if for some reason there are discrepancies found in the supplier’s documentation at a later stage. In that case, the buyer will be required to pay back the tax reimbursement to the government that too with an interest. This problem is usually fixed by the market forces, nevertheless, as non-compliant suppliers will soon find themselves losing customers because of their negligence. A mechanism has been put in place by the government to help with this issue, by providing a publicly accessible compliance rating system which will allow the consumers to pinpoint defaulters as the system starts to take effect.

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More challenging, perhaps, will be the short-term cash flow issues caused by Section 16 (11). Most businesses attempt to have an efficient working capital (i.e., the amount of cash kept in hand to bridge the gap between receiving cash from their customers and paying cash to their suppliers). If an entity can keep less cash in hand for the day-to-day activities, it can invest more in other undertakings, such as business expansion or an interest bearing savings account.

As the input tax credit can only be released once the supplier has submitted suitable documentation, businesses will have to account for possible delays and keep that much extra cash on hand, thus reducing the money available for potential growth and investment activities.

Furthermore, any relocation of the inventory from one state to another is considered a taxable event under the GST. Effectively, the tax will be charged on the goods or the services at the time of transfer and the compensating input tax credit will be only available for collection at the point of sale, this will put a further strain on the cash requirements for businesses. There is a possibility that due to the cash flow strains certain small businesses might have to even borrow money to fund their day-to-day activities, or much worse, close their operations.

Effects On Small Businesses:

A consequence of the documentation matching issue is the complications that may arise from purchases made from vendors who are exempt from registering for the GST. As stated earlier, the threshold rate for the registration and payment of GST has been lowered significantly. However, businesses with an annual turnover of less than INR 10 lakh for certain North-Eastern and Hill states and less than INR 20 lakh for other states remain exempt from the GST. The GST exemption has both advantages and disadvantages for small businesses.

To mitigate some of these complications, businesses can consider GST registration online, which simplifies the process and ensures compliance with the updated regulations. This step can help in maintaining proper documentation and avoiding potential issues with purchases from non-registered vendors.

An important advantage of the GST is not having to pay taxes on the goods and services provided by small businesses. This will allow small businesses to have higher profit margins, at the same time it will also permit them to offer a lower price than their larger competitors, steamrolling the playing field between small and large businesses to quite an extent. There is also the added advantage of not having the working capital issues that businesses that are registered under the GST have to deal with.

Many of these advantages may get nullified by the large administrative burden that is placed on the businesses that are buying from the suppliers that are exempt from paying GST. The responsibility is placed on the purchaser, who has to file all the related documentation on behalf of the supplier to get the input tax credit.

Outcome:

The input tax credit issues that are associated with the GST can have a considerable impact on small enterprises. If people are not educated on the GST, it will result in significant short-term cash flow problems in the months after its implementation, especially for small businesses. Furthermore, the unwieldy administrative burden that is associated with buying from exempt entities may end up providing a major disincentive for businesses that are looking to conduct any kind of transactions with small enterprises that could lead to a crowding out of Indian small business.

GST Implementation Issues — GSTN Functionality

Another important implementation issue can stem from the suggested technology backbone of the GST system. The IT infrastructure is the only way to track and then properly implement the emerging tax system. One of the biggest concern is the registration of users for the website. A lack of timely registration may cause a lot of serious problems for the viability of the GST.

Beside the registration challenge, the GSTN is also dealing with an auditing issue. Verifying and ascertaining the accuracy of data within the GSTN could pose a lot of problem, given its 70 million expected users. There is no way establish a proper functionality of the GST with proper audit of data.

GST Implementation Issues — Anti-Profiteering Clause

Another implementation issue that may prove to be a problem for the GST, could be that of the hyped benefits of the GST system is lowering of prices for many goods and services across the economy. As discussed earlier, businesses will be able to cut down on the effects of the double taxation which in turn should be passed on to the end user. To stop unwarranted profiteering from the changes in the tax systems, an anti-profiteering clause has been added to the GST. This clause requires that businesses should pass on any benefits from the change in tax systems to the end consumer. The clause doesn’t provide any mechanism for monitoring of the anti-profiteering activity.

The doubt associated with the anti-profiteering clause may affect both the businesses and the consumers. The private sector fears that the ambiguity in this clause may lead to a lot of problems, as tax authorities have been given leeway to make subjective judgements as to whether businesses are profiteering, without any laws or regulations to back their rulings. 

Key Problems of Implementation of GST

• GST requires up to 37 annual returns, significantly more than the previous 13 returns 
• Companies operating in multiple states face higher compliance costs 
• SMEs are particularly burdened by increased logistics and compliance expenses 
• GST is a consumption-based tax, disproportionately impacting lower-income individuals 
• Everyone pays GST regardless of financial status, affecting the poor and lower middle class more heavily
• India’s GST has multiple rates: 5%, 12%, 18%, and 28%, complicating the tax system 
• Multiple rates confuse businesses and customers, making compliance challenging 
• The service sector faces a higher GST rate of 18%, raising consumer costs 
• High-profit industries, like telecoms, have increased prices to offset the tax burden 
• GST benefits consumption states, challenging industrial states with lower tax contributions 
• The Compensation Act addresses this but complicates compensation calculations
• A reliable IT network is crucial for GST operations 
• The GSTN supports real-time integration but struggles with transaction volumes due to monthly return submissions
• GST migration incurred extra costs and labour for companies 
• Ensuring vendor registration on the GST network is essential for compliance and ITC claims 
• Businesses had to rewrite and standardise long-term contracts during the transition
• Anti-profiteering provisions require passing tax savings to clients, monitored by the Anti-Profiteering Authority 
• GST relies heavily on online technologies, posing challenges for SMEs lacking resources and technical know-how 
• Lowering duty limits increased the tax burden on more startups and SMEs 
• The judiciary resolves legal issues related to GST, providing guidance on regulations and interpreting statutes

The Goods and Services Tax if implemented properly can do wonders for the Indian economy.  With the elimination of the double taxation and the lowering of product price, the GST can also integrate the informal sector into the greater Indian economy and also provide a much needed boost for the countries flagging export market.

The GST system can prove to be a boon for the economy of this country if it is implemented in a proper manner. The lowering of product prices and elimination of the double tax system and implementation of GST can accelerate the growth of the export system and the economy. If you have any other queries regarding taxation or seek assistance with tax registration, feel free to get in touch with us and we will connect you to the right expert for the job.

Frequently Asked Question’s 

What are common challenges that businesses face when implementing GST?

Common challenges include Input tax credit, High compliance costs, Complex tax structure, Revenue shortfall, E-way bill system Filing, GST complication, GST non-compliant vendors, varying GST rates, and lack of IT infrastructure

What are the key technical issues encountered during the rollout of GST?

One of the primary issues with the implementation of the GST has been the high cost of compliance. An assessee is required to file up to 37 returns annually under the GST regime (three monthly filings and one annual return). In comparison, under the previous tax structure, 13 returns were required.

Which are the sectors dealing with challenges in GST adaptation?

The majority of services in the service industry are subject to an 18% tax, which is greater than previously and drives up prices for consumers states that produce goods but don't receive enough tax revenue under the consumption-based destination tax scheme. Telecoms is one of the large consumer-driven sectors that has increased prices to offset the increased GST tax burden.