Such incentives would go against ongoing efforts to simplify GST and really turn it into a ‘good and simple tax’
Ever since the Narendra Modi government came to power, one of the primary items on its agenda has been the transformation of India into a digitally empowered economy. To further this cause, a proposal to incentivise cashless transactions by offering a concession in tax rate was tabled before the goods and services tax (GST) council. The proposed scheme seeks to offer a 2% rate cut on business to consumer (B2C) transactions where payments are made digitally or by cheque. Its benefits will be limited to goods and services where the regular rate of tax is 3% or more, and the maximum amount of concession available will be capped at ₹ 100 per transaction.
The group of state ministers set up to evaluate the proposal recommended that its introduction should be deferred, citing loss of revenue as the primary reason. They reportedly stated that while they support the GST discount “in principle”, a concession in rates can wait as it is likely to hit tax collections by ₹ 14,000-15,000 crore.
While the proposed incentive is aligned with the government’s broader aim of digitizing the economy, there are reasons besides loss of revenue that make a strong case against its introduction.
GST was pitched as a “good and simple tax” meant to overhaul the previous indirect tax laws. In addition to having elaborate state-specific rate structures, the erstwhile laws were riddled with multiple exemptions that made for an immensely complicated landscape. One of the primary ideas behind GST was to do away with these complexities by introducing a uniform tax rate and minimizing exemptions. While the final legislation subsumed a variety of Central and state levies to impose a single tax, it did not deliver on the promise of a simplified rate structure. Besides four primary rate slabs, the GST contains a list of nil-rated goods and services and special rates applicable to situations such as the supply of precious metals and supplies by merchant exporters.
The diverse nature of our economy and the demands of India’s federal structure justified the initial need for multiple rates. However, a primary expectation from GST 2.0 is that the government will make the framework more coherent and taxpayer friendly by pruning the rates. The authorities have also acknowledged that there is scope for improvement in this regard and are reportedly exploring the option of merging the 12% and 18% GST rate brackets. Incentives for cashless transactions would go against such efforts. They would essentially add fresh tax brackets applicable to the goods and services that fall under the purview of this scheme. Instead of moving backwards, the government should take a conscious policy decision to avoid granting incentives that allow deviations from the general application of GST, as it would add another layer of complexity to an already convoluted system.
GST has been evolving constantly and has failed to give industry a sense of stability. Recently, a list of almost 50 proposed amendments to the GST laws was released. Further, decisions on crucial issues such as the compliance framework and the inclusion of items like petroleum products and alcohol are still pending. While the resolution of these pressing issues will undoubtedly be a step in the right direction, it is also likely to disrupt the way businesses are currently functioning and will require them to undertake internal changes.
Introducing the incentive in question will also subject businesses to additional reporting requirements and call for tweaks in their information technology systems, as they will have to offer customers two prices—one with a reduced rate and one with the regular rate. Against the backdrop of the GST’s chaotic first year, and coupled with the knowledge that the regime is unlikely to attain stability in the near future, the introduction of these incentives would only rattle industry further and add unnecessary speed bumps in GST’s quest for solidity.
Lastly, it is relevant to note that the roll-out of this landmark reform has been famously hailed as an outcome of “cooperative federalism”. For GST to be effective, the states let go of their fiscal autonomy and agreed to exercise taxation powers jointly with the Centre to create a single market. As a result, the inclusion of any special provisions—be it incentives or additional levies—needs to be approved both by the Centre and the states.
As noted earlier, the general aim of GST is to maintain uniformity and limit digression from the norm. However, if benefits on digital transactions are allowed without compelling reasons offered in their support, limiting subsequent deviations to only exceptional circumstances would become difficult. It would set a bad precedent and open the floodgates for future proposals, seeking distinct treatment for a class of goods and services.
The road leading up to GST implementation has been anything but smooth and the law is still a work in progress. The authorities should channel their efforts towards ironing out the existing problems, and not cause unnecessary turbulence to push political agendas. In the light of uniformity and simplicity being GST’s main objective, even after the regime picks up momentum, the council must adopt a strict approach while evaluating proposals that call for a digression from the GST norm—regardless of whether these proposals concern the grant of concessions or additional impositions.
Vidushi Gupta is a research fellow at Vidhi Centre for Legal Policy.
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