How stable was indirect tax in 2021.

The National Institute of Public Finance and Policy has also highlighted the importance of a 3 rate framework of 8%, 15% and 30% in a study.

India saw its fourth year under the Goods and Services Tax regime in 2021. While the failure and success of India's largest indirect tax are still debatable, the taxation system's toddler days stand behind it. Simply put, it is time to analyze and understand the degree of stability of the GST system in India.

Four years later, taxpayers in India still seem to be having difficulties dealing with the number of tax slabs, changing policies, deadlines, etc. A major issue for the Goods and Services Tax in India, since its implementation, has been the number of tax slabs. However, it is being said that the Finance Ministry is looking at a complete redesign of tax slabs. As a part of the rate rationalization exercise, the fitment committee of the goods and services tax (GST) has proposed raising the 5% slab to 7% and 18% slab to 20%. This rate rationalization is crucial to aiding State governments, who are likely to face a revenue shock due to the scheduled expiry of the GST compensation period on June 30 next year, when India completes 5 years of GST. Augmentation of GST revenues through rationalization of the rates structure and improved compliance is expected to mitigate the situation's impact. The National Institute of Public Finance and Policy has also highlighted the importance of a 3 rate framework of 8%, 15%, and 30% in a study.

There is also a possibility of merging the lower tax slabs into one. However, there is no actual clarity on the situation so far. That means the current tax slabs and their applicability continue to confuse taxpayers leading to erroneous filing, incorrect tax payments, increased back taxes, and fluctuating GST revenue.

A major challenge that impacts the stability of GST in India is its technical operations. Very often, taxpayers face technical challenges while trying to maneuver through the filing process. Presently, there is no facility to download an annual GSTR2A, and it must be viewed month on month, making it difficult to match the numbers with the account books accurately. Additionally, the fact that it is not possible to amend GSTR3B and taxpayers must wait a month to make corrections makes the filing process extremely cumbersome. Similar issues in GSTR1 and TRAN1 forms pose a challenge to taxpayers and increase the risk of them skipping out on paying taxes.

The process of Invoicing was expected to bring about a massive improvement and ensure greater transparency in supplier-receiver transactions. However, technical glitches have considerably slowed down this process.

Like every other country that has implemented some system of indirect taxation, be it Value Added Tax, Sales Tax, or GST, there have always been longstanding issues around indirect taxation systems. These include the above-mentioned issues like the complexity of the taxes, the number of tax slabs, transparency in taxpayer transactions and government levels, and curbing tax fraud. But as the economy evolves, newer challenges need to be addressed. India's ability to address these challenges can determine our degree of stability under the Goods and Services Taxation System. So what are these challenges, and how can India manage them? Let's find out. 

Automation is key to achieving stability in an indirect taxation system. That's good news because India is steadily moving toward using automation, machine learning, and artificial intelligence solutions in its indirect tax operations. Implementing automation technology in the indirect taxation system facilitates more transparent and smoother operations. It is also helping curb tax fraud. That being said, almost all countries are experiencing the rise and expansion of what is called the digital economy. Essentially, a digital economy is based on digital computing technologies and conducts business through markets based on the internet.

At a recent NASSCOM Summit, India's Union Minister of State for Electronics and IT, Rajeev Chandrasekhar, said, "India has untapped manufacturing, engineering and digitalization opportunities that will help the country reach its vision of a $1 trillion digital economy in the next five years. As of 2021, India's Engineering, Research, and Development sector generate a revenue crossing $31 billion. These tectonic shifts call for a capability changeover to embedded systems, digital innovation, and cyber security."

Along with the expansion of a digital economy come additional challenges, especially around cross-border transactions. It is crucial to address cross-border challenges to facilitate a smooth flowing taxation system. For starters, keeping up with the pace at which businesses are evolving is rather tricky. As the taxpayer base increases and enterprises actively participate in fulfilling compliance requirements, they are required to deal with changing tax jurisdictions, different taxation systems, different tax rates, policies, deadlines, and other compliance requirements.

While existing indirect-tax laws in the country might not be adequate or even equipped to manage upcoming disruptive business models arising from a digital economy, India's equalization levy is likely to pave the way for a smoother, better taxation system. In the meantime, automation solutions will help accelerate the process of implementing new policies to accommodate the new compliance requirements in an era of digital disruption.

Automation solutions can help businesses figure out their tax liabilities by jurisdiction, product code, deadline, and taxation system. They can replace cumbersome tasks of manually determining compliance requirements and coordinating between tax teams across various jurisdictions, thereby reducing the scope of human error. Their intelligent learning systems can also provide insights to businesses to help them make the most of tax holidays, tax benefits, and trade agreements. With automation solutions, businesses can actively fulfill compliance requirements and maneuver taxation systems not just in India, but across borders.

Author: Anil Paranjape, Director, Avalara India

Publication: India Infoline