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5 Years of Goods and Services Tax (GST)

Context:

After being in effect for five years, it appears that the controversial indirect tax system, the Goods and Services Tax (GST), is now becoming more stable.

Objectives and need of GST

• In most countries, a single rate structure is adopted for tax systems.
• The objective of adopting a single rate structure is to simplify the tax system.
• It is done to prevent misclassifications and litigations arising from complex tax structures.
• Another reason is to avoid an inverted duty structure where taxes on inputs exceed those on outputs, which requires detailed scrutiny and refunds.

Overview and Mechanism of GST

• GST is India's largest indirect tax reform that started on 1st July 2017.
• It follows a multi-stage collection mechanism.
• It is a single tax that applies to the supply of goods and services from the manufacturer to the consumer.
• Input tax credits paid at each stage are available in the subsequent stage of value addition, making GST a tax only on value addition at each stage.
• The final consumer pays only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
• GST is intended to be a unified indirect tax throughout the country on goods and services.

Key Features of GST:

• GST applies to the "supply" of goods or services instead of the previous concept of taxing only the manufacture, sale or provision of services.
• GST is based on the principle of destination-based consumption taxation, unlike the present system of origin-based taxation.
• It is a dual GST with both the Centre and States levying tax on a common base.
• The GST levied by the Centre is called Central GST (CGST) and that by the States is called State GST (SGST).
• An Integrated GST (IGST) is levied on inter-state supply, including stock transfers, of goods or services.
• GST is charged at four different rates: 5%, 12%, 16% and 28%.
• The GST does not apply to alcoholic liquor for human consumption and only five petroleum products: petroleum crude, motor spirit (petrol), high-speed diesel, natural gas, and aviation turbine fuel.
• The GST Council, headed by the Union Finance Minister, is the governing and decision-making body for GST.

Achievements of GST:

• The revenue from GST has been increasing and touched a record of Rs 1.68 lakh crore in April 2022, indicating reasonably high buoyancy.
• The GSTN technology platform has become stable.
• The mandate for e-invoicing for businesses above Rs 100 crore has improved invoice matching and helped detect fake invoices that were used to claim input tax credit. This has led to better tax compliance and enforcement.
• The cooperative federalism approach of GST has been a remarkable achievement, with the Union and state governments giving up their tax autonomy to harmonize domestic trade taxes.
• The transition to an automated indirect tax ecosystem has been successful in India, with everything now online, from electronic compliances and e-invoice generation to tracking goods movement through e-waybill.
• The use of technology in GST has reduced fake invoicing, led to smoother consignment movement, and fewer disputes with officials.
• The introduction of GST has reduced transaction costs and removed hidden and embedded taxes, making domestic industries more competitive in the national and international markets.
• The seamless tax-credits system throughout the value-chain, and across boundaries of states, ensures minimal cascading of taxes, thus reducing hidden costs of doing business.
• GST has given a significant boost to the ‘Make in India’ initiative of the Government of India by making goods and services produced in India competitive.

Shortcomings /Challenges of GST:

• Refund delay issues: Despite efforts by the Government to improve the process, automatic processing of refunds under GST remains a major concern, especially for exports.
• Rate differentiation: The use of multiple tax rates creates inefficiencies and challenges in targeting benefits for the poor.
• It can also lead to confusion for taxpayers and tax administrators.
• Lack of dispute redressal mechanism: There is no statutory mechanism in place to ensure uniformity in rulings by GST authorities.
• Constant amendments: Frequent revisions to the GST law have led to confusion among taxpayers and tax administrators.
• Adaption & technical issues: Small and medium businesses continue to face challenges in adapting to the tech-enabled GST regime. Technical glitches have impaired the ease of compliance and flow of input credits.
• Complex penalties: Some businesses feel unfairly penalized for the tax compliance deficiencies of their vendors.
• Other concerns highlighted by the 15th Finance Commission include:
  • Multiplicity of tax rates
  • Shortfall in GST collections
  • High volatility in GST collections
  • Inconsistency in filing of returns
  • Dependence of States on compensation from Centre

Proposals for Improvement of GST System

• Revisit anti-profiteering measures and simplify compliance procedures to ensure cost efficiency and reduction in prices benefit the common man.
• Establish a robust dispute redressal mechanism to overcome issues related to GST disputes and increase tax administration efficiency.
• Implement administrative reforms to address irregularities and remove gaps in advance rulings provisions under the GST law.
• Address the impact of the pandemic on GST and the economy through structural level changes to the law.
• A group of ministers (GoM) has proposed removing exemptions on various services, including stay in cheaper hotel rooms, hospital rooms above a tariff threshold, and services provided by financial sector and food safety regulators to improve the GST system.

Inflation Targeting

Why in news:

The inflation-targeting framework set by the government for the RBI, which is 4% with a tolerance band of +/- 2 percentage points, has remained unchanged for the period of five years starting from April 1, 2021.

Flexible Inflation Targeting Framework in India

• The Central Government established a target of 4% Consumer Price Index (CPI) inflation from August 5, 2016, to March 31, 2021, with a tolerance limit of 2-6%.
• The Reserve Bank of India (RBI) Act was amended in 2016 to introduce a flexible inflation targeting framework in India.
• The amended RBI Act mandates the Government of India, in consultation with the Reserve Bank, to set the inflation target once every five years.

Inflation Targeting:

• Inflation targeting is a monetary policy implemented by central banks.
• The goal of this policy is to achieve a specific annual inflation rate.
• The policy is based on the belief that controlling inflation is crucial for maintaining price stability and achieving long-term economic growth.

Inflation:

• It describes the increase in costs for the majority of items and services used on a daily or routine basis, such as food, clothing, housing, etc.
• It tracks the average price change over time in a group of goods and services.
• 'Deflation' is the opposite and uncommon decline in the price index of this assortment of goods.
• It is a sign that a country's currency is losing some of its purchasing value.
• Percentage is used to express this.

Open Acreage Licensing Programme

Why in News:

• The Indian government has recently initiated the OALP Bid Round-VIII, which involves presenting 10 blocks for International Competitive Bidding.

Overview of the Open Acreage Licensing Policy (OALP):

• The Hydrocarbon Exploration and Licensing Policy (HELP) replaced the New Exploration Licensing Policy (NELP) in March 2016 as a means of accelerating Exploration and Production (E&P) activities in India.
• The Open Acreage Licensing Policy (OALP) was launched in June 2017 along with the National Data Repository (NDR) as the primary drivers for HELP.
• OALP enables companies to select specific areas where they would like to explore oil and gas, and these areas are then put up for auction.
• Companies can express their interest in any area throughout the year, which is accumulated three times a year before the auction takes place.

Understanding Hydrocarbon Exploration and Licensing Policy (HELP)

About HELP:

• HELP stands for Hydrocarbon Exploration and Licensing Policy.
• The new policy was introduced as a government strategy to increase India's oil and gas output by 2022-23.
• It promises simpler rules, tax breaks, and pricing and marketing freedom.

Functions of HELP:

• Uniform Licensing:
  • HELP provides for a uniform licensing system for all hydrocarbons such as oil, gas, and coal bed methane.
  • Unlike the previous policy, NELP, which issued separate licenses for different types of hydrocarbons, HELP aims to reduce costs and simplify the process.
• Revenue Sharing Model:
  • HELP introduced a revenue-sharing model where the government receives a share of the gross revenue from the sale of oil and gas, without worrying about the cost incurred.
  • NELP had a profit-sharing model, which led to delays and disputes as the government had to scrutinize cost details.
• Pricing:
  • HELP provides marketing and pricing freedom, which was not available under the previous policy.
  • Under the previous policy, contracts were based on production sharing, which led to the possibility of gold plating and manipulation of profits, causing loss to the government.
  • HELP introduced a revenue-sharing model to reduce the complexity of handling contracts.
  • Under the new system, a graded system of royalty rates was introduced where royalty rates decrease from shallow water to deep water to ultra-deep water areas.
  • This system is designed to account for the different levels of exploration costs and risks associated with each type of water area.

Benefits of Hydrocarbon Exploration and Licensing Policy (HELP):

• HELP provides marketing freedom for crude oil and natural gas produced from the blocks, aligning with the Government's policy of "Minimum Government-Maximum Governance."
• Unlike NELP, where the government scrutinized private participants' cost details, HELP promotes 'Ease of Doing Business' by simplifying the licensing process and revenue sharing model.
• HELP signifies a shift from government control to government support for upstream E&P in India, making it easier for private companies to invest and explore in the hydrocarbon sector.
• OALP, a key driver under HELP, allows companies to explore areas of their choice without restrictions, providing both data and discretion for exploration.

Depreciation of Indian Rupee

Why in news:

• In early trading, the exchange rate of the Indian rupee against the US dollar crossed the significant psychological level of 80.

Reasons for the weakening of Indian Rupee against the US Dollar:

• Global factors such as Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions
• Significant dollar demand from oil importers amid elevated crude oil prices and concerns about swelling trade deficit

Impacts of the weakening Indian Rupee:

• Imports will become more expensive, putting extra pressure on the pockets of people in an import-oriented economy
• Oil and gas sector will be adversely impacted as India imports a large percentage of its oil and gas
• It will expand the country's current account deficit and put pressure on the exchange rate
• Indian solar plants, which heavily depend on imported solar cells and modules, will face rising project costs and tariffs, which will lead to margin compression for upcoming projects
• Costlier imports will widen the trade deficit and push up inflation domestically

Cheaper exports:

• A depreciating rupee makes exports cheaper, which benefits industries linked to exports like pharma and IT.

RBI's Actions to Stabilize the Indian Rupee

• The RBI regularly keeps an eye on the foreign exchange market and intervenes during times of excess volatility.
• In order to attract foreign currency inflow and support the rupee, the RBI has implemented various measures recently. For example, it has raised overseas borrowing limits for companies and made foreign ownership rules easier in government bonds.
• The RBI has also proposed a rupee settlement mechanism, which will allow foreign companies to make payments in rupees instead of US dollars. This is expected to reduce the need for US dollars in foreign trade, which will help stabilize the rupee's value.

Strategies for RBI and Policymakers in Response to Rupee Depreciation

• The Reserve Bank of India (RBI) cannot sustainably prevent the depreciation of the rupee in the long run, as global investors have more significant financial resources. Instead, allowing the rupee to depreciate could serve as a natural shock absorber to adverse terms of trade.
• Analysts suggest that the RBI should concentrate on managing inflation, as it is legally obligated to do, and the government should reduce its borrowings.
• The RBI can intervene in the foreign exchange market to reduce volatility and ensure stability.
• One option available to the policymakers is to increase exports, which will increase foreign currency inflows and reduce the current account deficit.
• Policymakers may also encourage foreign investment in the country to increase capital inflows and support the rupee.
• Another option is to reduce the dependence on imports by promoting domestic production, which can reduce the cost of imports and the trade deficit.

Summary of Findings

• The depreciation of the rupee can boost export competitiveness and have a positive impact on the economy.
• Despite recent depreciation, the rupee has performed better in comparison to previous financial crises.
• While the rupee has depreciated against the US dollar, it has appreciated against other major currencies.
• In normal circumstances, rupee depreciation can be beneficial for the current account deficit by increasing exports, but high inflation may be exacerbating the situation.
• The RBI may intervene further if the rupee continues to decline.

RBI allows Trade Settlements in Rupee

Why in news:

• The Reserve Bank of India (RBI) has recently introduced a mechanism to facilitate international trade in Rupees (INR).
• Banks acting as authorized dealers for such transactions must obtain prior approval from the regulator to facilitate this process.
• According to the framework for cross-border trade transactions in INR under Foreign Exchange Management Act, 1999 (FEMA), all exports and imports under this mechanism can be denominated and invoiced in INR.
• The exchange rate between the currencies of the two trading partner countries may be determined by the market.

Overview of the Rupee Payment Mechanism

Understanding the Existing Mechanism of International Trade:

• Indian companies engaged in international trade have to transact in foreign currency, except for Nepal and Bhutan.
• For imports, the Indian company has to pay in foreign currency, usually dollars but can include other currencies.
• For exports, Indian companies receive payment in foreign currency which they convert to rupees as needed.

Need for the Rupee Payment Mechanism:

• The existing mechanism of international trade in foreign currency leads to foreign exchange risks for Indian companies.
• It also leads to additional costs associated with currency conversions.
• There is a need for a mechanism that enables international trade in Indian rupees.

Features of the Rupee Payment Mechanism:

• Authorised Dealer Banks in India can open Rupee Vostro Accounts on behalf of their partner banks.
• Indian importers can pay in INR, which will be credited to the Special Vostro account of the correspondent bank of the partner country.
• Indian exporters will receive payment in INR from the designated Special Vostro account of the correspondent bank of the partner country.
• Indian exporters may also receive advance payment against exports in INR through this mechanism.
• The balance in Special Vostro Accounts can be used for project and investment payments, export/import advance flow management, and investment in Government Treasury Bills and securities.

Benefits of the Rupee Payment Mechanism

Promoting growth:

• The mechanism will support the growing interest of the global trading community in INR, which in turn will promote growth of global trade.

Trade with sanctioned countries:

• The mechanism can help ease payment problems for trade with countries that are under sanctions, such as Russia.

Reducing forex fluctuation risk:

• The use of INR for trade transactions can reduce the risk of forex fluctuation, particularly when it comes to the Euro-Rupee parity.

Reducing demand for foreign exchange:

• The mechanism aims to reduce the demand for foreign exchange by promoting rupee settlement of trade flows, which could help to arrest the fall of the rupee amidst ongoing weakness.

India's Initiatives for International Trade

Rupee-Rouble Trade Agreement:

• The Rupee-Rouble trade agreement provides an alternative payment mechanism to settle dues in Rupees instead of Dollars or Euros.
• The State Bank of the U.S.S.R. will hold one or more accounts with commercial banks in India authorized to deal in foreign exchange.
• Payments made to and by Indian and USSR residents will be done only in these accounts by debiting/crediting.

Free Trade Agreements:

• India has signed Free Trade Agreements (FTA) with Australia and UAE recently.
• FTAs are agreements between two or more nations to reduce barriers to imports and exports among them.
• Under FTA, goods and services can be traded across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

Indo-Pacific Economic Framework:

• India has joined a US-led initiative to set up an Indo-Pacific Economic Framework (IPEF) to boost economic ties.
• The US has been India's largest market for services exports, but recent overseas sales of merchandise goods to the US overtook China, making it India's largest bilateral trading nation.

Benefits of India's International Trade Initiatives:

• India's international trade initiatives, such as the Rupee-Rouble agreement and FTAs, promote growth of global trade and support the global trading community's interest in INR.
• India's trade facilitation mechanism has eased payment issues with Russia due to trade sanctions.
• The initiatives would reduce the risk of forex fluctuation and arrest the fall of the rupee by promoting rupee settlement of trade flows.

Competitiveness Roadmap for India@100

Why in News:

• The Economic Advisory Council to the Prime Minister (EAC-PM) has recently unveiled the Competitiveness Roadmap for India@100.

Highlights of the report

Collaboration:

• The report is a collaborative effort between EAC-PM and The Institute for Competitiveness.

Vision:

• The report envisions setting new guiding principles for India's growth journey in the following years.
• It aims to guide different states, ministries, and partners to develop sector-specific roadmaps for achieving targeted goals.

Framework by Michael E. Porter:

• The report is based on the Competitiveness framework developed by Professor Michael E. Porter.
• The framework emphasizes productivity as a driver of sustained prosperity and highlights the context that a nation provides for firms and individuals to be more productive.

'4 S' Principles:

• The Competitiveness roadmap for India@100 follows the '4 S' guiding principles to become a high-income country by 2047.
• The '4 S' guiding principles stress the need for prosperity growth to be matched by social progress, shared across all regions, environmentally sustainable, and solid in the face of external shocks.
• The '4 S' guiding principles pave the way for resilient and holistic development.

Importance of the Report on Competitiveness Roadmap for India@100

• Provides a strategic perspective: It outlines actionable insights on how to utilize diagnostic assessments of a country's competitiveness fundamentals to improve economic and social policies.
• Cornerstone of economic and social policy: The competitiveness approach is crucial to India's long-term economic growth and should be a foundation of its economic and social policies.
• Thorough diagnostic assessment: The report provides an in-depth analysis of India's current competitiveness level, primary challenges, and opportunities for growth.
• Pathway to high-income country: The roadmap recommends essential areas of action, such as improving productivity and labor mobilization, creating competitive job opportunities, and enhancing policy implementation across ministries to achieve high-income country status by 2047.
• Collaborative efforts: To accelerate India's development, government policies and enterprise markets must work together effectively.
• Focus on ease of living and doing business: India aims to create a sustained growth model based on ease of living for its citizens and ease of doing business for industries.

Way forward

• Clear strategy needed: The report suggests that a clear strategy focusing on key priority areas is needed to accelerate progress, rather than narrow interventions.
• New guiding principles: The recommendations in the roadmap take into account India's unique advantages and are based on a new set of guiding principles, policy goals, and implementation architecture.
• Insights for the world: Understanding India's competitiveness challenges and opportunities can provide insights into the challenges and opportunities that the world is facing.
• Impact on policy implementation: The change in approach to development in different sectors and states will not only shape policy actions today but also impact the design and implementation of future policies.