The Goods and Services Tax (GST), India's largest tax reform since independence, has now spanned six years since its implementation in July 2017. It would not be a hyperbole to say that the reform has managed to significantly transform businesses, provided much needed impetus to supply chains and as a result, has transformed the optics through which companies and countries are viewing India as a favorable business destination.
To ascertain industry views on the GST journey so far and understand future expectations, Deloitte conducted an online survey in May 2023, reaching out to senior leaders across industries and various categories of companies. The survey elicited a total of 612 responses, with MSMEs comprising 21% of respondents.
The survey revealed that a significant 94% of respondents across industries expressed an affirmative sentiment towards GST, by acknowledging that the government’s proactive measures, specifically over the past year to simplify compliance, have played a crucial role in fostering a positive GST experience.
While the progressive momentum of the GST regime has been collectively appreciated, as a way forward, India Inc. believes that the time has come to unleash the next phase of GST reforms to enhance Ease of Doing Business (EoDB), resolve legislative ambiguities and give new impetus to India’s growth story.
Export rule liberalization – 78% respondents cited this as the most needed. To illustrate, while the Central Board of Indirect Taxes and Customs issued a defining circular in September 2021 clarifying doubts on the scope of intermediary services, the benefit is yet to be fully witnessed with certain categories of exporters in the IT/ITeS and data hosting services sector still being continually questioned, resulting in prolonged litigation and the delay in refund resulting in working capital blockages. Several countries including Australia, China, UK, Singapore, EU, Russia, Netherlands, New Zealand, Ethiopia, and US (Hawaii only) follow destination principal for intermediary services.
With India’s services exports shooting up a record 26.6% in FY23 to $322 billion and SEPC estimating that it may touch $400 billion in FY23, the government could consider reviewing the export rules and removing the exceptions to help our flagbearer export services sector.
Taxation of deemed supplies – About 73% respondents found favor with the proposal to introduce regulatory amendment to do away with the levy of GST on deemed supply on import of services under the reverse charge mechanism, where recipient is eligible to full input tax credit (revenue neutral). This would be aligned to global VAT laws, specifically EU VAT laws.
The issue has been a bone of contention, considering there is no clarity on the commercial exploitation principle which invokes taxability on such transactions, resulting in inquiries and litigations.
Unlocking of working capital – More than 80% businesses concurred that the transfer of CGST and IGST cash ledgers amongst “distinct persons", has ensured seamless intra-organisational transactions and efficient cash-balance utilization.
With a focus on unlocking working capital for taxpayers, 77% respondents voted in favour of amending legislation directed towards transfer/cross-utilization of CGST credit between distinct persons. This recommendation is revenue neutral for the government and shall ensure in unblocking several thousand crores worth of accumulated ITC.
Another ask has been that GST credits should be refunded in a manner similar to refund of the end-of-year state VAT credits to the taxpayers. This tried, tested, and globally aligned approach should be brought about in the GST law as well.
Removal of restrictions on ITC - With 68% respondents in favour, another aspect around credits has been removal of restrictions around credit availability in relation to employees and setup of commercial infrastructure. These restrictions significantly impact infra/investment heavy sectors, such as telecom, warehousing/logistics, e-commerce, etc. With the projected growth in economy which warrants infra investments as well as employment creation, this aspect merits consideration and with the buoyancy in revenues, this is an avenue for the government to consider.
As we enter the seventh year of the GST regime, it is crucial to address the prolonged issues and challenges while embracing forward-looking thoughts. Implementing appropriate reforms, India can unlock the full potential of GST, promote economic growth, enhance tax compliance, and create further ease of doing business.
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