GST 2.0: A glimpse of what should be the next phase in India's transformative tax regime

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The indirect tax regime in India underwent a revolution with the introduction of the GST law in July 2017. As the nation recognised a system of one taxation regime, various hardships for businesses were removed—specifically that of the multiplicity of taxes and non-fungibility of credits between the Centre and states. While the idea of “one nation, one tax” has seen the light of day with the implementation of GST, the law is still evolving and can be a better version of itself, let’s say with GST 2.0.

Though GST brought in credit fungibility, businesses are still facing inherent working capital challenges due to accumulated credit which calls for further streamlining of the laws and processes. Typical causes for such accumulation include:

(i) Seasonal businesses or inventory build-up for festival sales,

(ii) Projects with long gestation period,

(iii) Thin margins or losses due to drop in commodity prices,

(iv) Inverted duty structure as well as the exclusion of service credit from inverted duty refund claims, and

(v) Exclusion of capital goods’ credit in export refund claims under the letter of undertaking.

With the Union Budget for FY22-23 being on the horizon, the government must consider some of the largely revenue-neutral proposals, that if implemented, will be pathbreaking and lead to increased liquidity in the hands of the companies/taxpayers along with a higher economic output.

Also Read: GSTIN: What is it, format and example of the 15-digit GST number

Tradeable credit scrips

With e-invoicing in place, for all assessees with turnover exceeding Rs 50 crores, the government has data of all the invoices generated. With the recently introduced ‘one to one’ matching concept [vide amendment to section 16(2) of the CGST Act, 2017 and Rule 36(4) of the CGST Rules, 2017], there is a leak-proof credit system in place for the government as well as the taxpayers.

The government could introduce a mechanism to allow the transfer of accumulated credits between businesses by issuing freely tradeable credit scrips. It would help businesses quickly liquidate input GST credits lying as an asset in their books. The scrips could be for pan-India trade in case of IGST and CGST credit, as well as state-level trade for SGST credit.

Mechanism of GST groups

The EU VAT laws (for example, UK and Ireland) allow a facilitation measure by which two or more eligible persons can be treated as a single taxable person for VAT purposes.

Borrowing this concept, group companies should be allowed to operate as a GST group, wherein intra-group transactions can still be kept taxable but with the added flexibility of utilising credits out of the common credit pool of the GST group.

Allow reverse charge payment using input credits

At present, taxpayers need to mandatorily deposit GST on reverse charge cases through cash which is then re-availed as input credit. This becomes a futile exercise for companies eligible to avail of 100 percent credit. This holds good even for IGST paid on import of goods, which is available as credit to the importing entity.

Taxation laws in countries such as Singapore and UK do not require reverse charge liabilities to be discharged through cash. Taxpayers in these countries are eligible to input tax credit on such reverse charge liability the moment they report the reverse charge liability in the returns (i.e., in the same tax period). Thereby negating the requirement to pay such reverse charge liability through cash.

When implemented in India, it would result in improved cash flows in the hands of the businesses and the entire exercise would be revenue neutral as it remains today. This would indeed be great facilitation for businesses.

Allowing credit transfer between distinct persons for IGST and CGST

While SGST credit is state-specific, CGST and IGST credits are also maintained and utilised registration-wise, whereby excess credit in one registration cannot be used by other registration of the same taxpayer.

With both CGST and IGST being accounted for (later settled with the states) and maintained by the central government, the government should consider a transfer of IGST and CGST credits among distinct persons (similar to how the GST Council has approved a transfer of cash ledger balances in its 45th meeting). This would aid businesses by ensuring optimal credit management and utilisation.

Concluding thoughts 

The above recommendations would not only release the working capital pressures faced by the taxpayers but also support increased economic activity as businesses would be able to make the best use of tax credits and their cash capital. The government should consider these in the next GST Council meeting.

The writer is a Partner at Deloitte India.

The thoughts and opinions shared here are of the author.