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In a notable assertion of federal solidarity, Union Finance Minister Nirmala Sitharaman underscored the Centre’s steadfast support to States through timely tax devolution and the clearance of GST compensation arrears, aimed at stimulating economic growth. This was prominently highlighted during the 53rd GST Council meeting held in New Delhi on June 22, 2024.

During this crucial pre-Budget consultation, states collectively voiced their need for augmented funding for various pivotal projects. Sitharaman reaffirmed the Union government’s commitment to facilitating growth by ensuring the timely distribution of tax revenues, Finance Commission grants, and the settlement of GST compensation dues.

The discussion pivoted to the ‘Scheme for Special Assistance to States for Capital Investment,’ where Sitharaman pointed out that while the majority of loans under this scheme are untied, a significant portion is contingent upon states meeting specific citizen-centric reforms and undertaking sector-specific capital projects. She urged states to utilize these loans by adhering to the stipulated criteria to maximize their developmental impact.

Kerala Finance Minister KN Balagopal made a compelling case for a special package of ₹24,000 crore in the 2024-25 Budget, aimed at alleviating the state’s current liquidity challenges. Simultaneously, Karnataka Finance Minister Krishna Byre Gowda emphasized the urgency of releasing ₹5,300 crore for the Upper Bhadra Water Project and called for its recognition as a national project. Gowda further advocated for the inclusion of cesses and surcharges in the divisible pool to ensure states receive their rightful share of central taxes, and sought a substantial increase in the central contribution to housing scheme beneficiaries.

Rajasthan’s Finance Minister and Deputy Chief Minister, Diya Kumari, articulated the state’s request for increased allocations towards critical projects such as the Eastern Rajasthan Canal Project (ERCP), Jal Jeevan Mission (JJM), select national highway projects, and railway lines. This concerted push from states underscores the ongoing need for robust federal support to drive regional development and economic resilience.

As demand resurges and growth prospects brighten, the onus now falls on the industry to ramp up investments. India’s private sector can no longer rely on the government to shoulder the burden of capital expenditure indefinitely.

Industry associations, predictably, have begun circulating their standard wish-lists in anticipation of the 2024-25 Budget. These proposals include calls for bolstering rural infrastructure, stimulating consumption, creating jobs, privatizing PSUs, rationalizing GST, and enforcing anti-dumping measures. Yet, it is surprising to note the persistent demands for the Centre to further increase its capital spending. One such demand calls for a 25% increase in capital outlays for the FY25 budget, surpassing the 17% hike seen in the interim Budget.

The expectation that the Central government will perpetually lead in fixed capital investments while the private sector waits for ideal conditions is untenable. With significant tax concessions granted to private corporations pre-Covid, India Inc emerged from the pandemic in a stronger position than households. National Accounts data reveal that as the Centre tightened its belt on revenue spending and shifted towards capital expenditure, government-driven Gross Fixed Capital Formation (GFCF) surged by 64% from FY19 to FY23, compared to a 52% increase in private sector GFCF. Over the past five years, the private sector’s share in capital formation has declined while the government’s has risen. It is high time for India Inc to take the lead in capital investments, allowing the government to focus on fiscal consolidation.

The typical justifications provided by industry leaders for delaying capital expenditure are becoming less convincing. Recent trends in sales of FMCGs, white goods, e-commerce, two-wheelers and cars, air traffic, and hotel bookings contradict the assertion of uncertain domestic demand. Additionally, consumer optimism reflected in the RBI’s forward-looking surveys, alongside a more than 20% growth in bank retail credit offtake, indicate robust demand. In recent months, real GDP figures have surpassed estimates, and Purchasing Managers Indices (PMIs) for both manufacturing and services have remained in expansion. The RBI’s latest OBICUS survey (Q3 FY24) shows industrial capacity utilization at 74.7%, dispelling any notion of idle factories or a dearth of orders. Furthermore, aided by tax cuts and stable commodity prices, India Inc has witnessed substantial growth in profitability and cash flows over the past five years, with net-debt-to-EBIDTA ratios halving during this period. Consequently, rising interest rates have had minimal impact on corporate debt servicing capabilities.

It remains unclear what signals India Inc is awaiting to initiate capital expansion. The current environment is ideal for the private sector to commence its capital investments, enabling the Centre to prioritize fiscal consolidation over sustained capital expenditure boosts. The government must reduce its market borrowings to free up space for the private sector to finance its capital expenditure and allow the Monetary Policy Committee to consider easing interest rates.

In a remarkable turn of events, e-way bill generation reached an unprecedented 10.32 crore in May, marking the second-highest figure ever recorded. Traditionally a quieter month, May’s surge can be attributed to a robust demand for electronic items and cooling products. This data, sourced from the GSTN, signifies the third instance of e-way bills surpassing the 10 crore threshold, with the peak recorded at 10.35 crore in March of this year and the previous second-highest at 10.03 crore in October of last year. The rise in e-way bill generation is poised to positively influence GST collections.

An e-way bill, an electronic document generated on a portal, certifies the movement of goods and indicates whether tax obligations have been fulfilled. According to Rule 138 of the CGST Rules, 2017, every registered entity involved in the movement of goods valued over ₹50,000 is mandated to generate an e-way bill, although this threshold can be lower for intra-state transactions.

Several factors contribute to the higher generation of e-way bills. Despite their longstanding presence in the Indirect Tax domain, the integration with e-invoicing and rigorous enforcement by mobile squads under the GST regime have successfully brought unorganized movements and supplies within the GST ambit.

Experts highlight that the uptick in e-way bill generation mirrors a significant increase in consumption across various sectors, driven by heightened economic activities necessitating transportation and logistics services. Parag Mehta, Partner at N.A. Shah Associates, notes that retail businesses across India experienced a sales boom in May, particularly in the consumer durables and electronics sectors. This spike in sales has naturally led to increased goods movement. Additionally, substantial rises in exports and imports have further fueled the increase in e-way bill generation, streamlining various sectors and boosting GST collections.

Ashok Kumar Batra, Chair of the Indirect Tax Committee at PHD Chamber of Commerce and Industry (PHDCCI), underscores the successful integration of technology and taxation systems as a critical factor behind the surge. The real-time tracking and monitoring capabilities of e-way bills enhance tax administration, curb tax evasion, and ensure the seamless flow of goods across state borders.

Batra further elaborates that while an increase in e-way bills typically signals higher goods supply and potential tax collection, historical data suggests that the correlation between e-way bill generation and GST revenue is not always directly proportional. Nevertheless, it remains a strong indicator of enhanced tax collection.

This rise in e-way bill generation not only reflects the vitality of the Indian economy but also underscores the effectiveness of the GST framework in capturing the full spectrum of goods movement, thereby enhancing revenue collection and promoting a more organized market environment.

The GST Council is poised to propose stricter regulations for new registrations, with a particular emphasis on biometric verification. Concurrently, there is an anticipation of Tax Collected at Source (TCS) relief for e-commerce operators. These deliberations will be central to the Council’s forthcoming session on June 22, presided over by Finance Minister Nirmala Sitharaman—the first meeting since October.

Key measures under consideration include mandating biometric checks for all new GST registrations, a significant step aimed at curbing tax evasion through fraudulent entities and identities. This initiative follows a pilot project launched in Gujarat last July, which was subsequently extended to Puducherry and Andhra Pradesh. Initially targeted at high-risk applicants opting for Aadhaar authentication, the scheme involved document verification at facilitation centers and biometric submission. The Council now proposes to implement this scheme nationwide, impacting the 1.46 crore registered taxpayers across India.

In addition to registration reforms, the Council may also recommend reducing the TCS rate on e-commerce transactions from 1% to 0.5%. Currently, e-commerce operators collect TCS at 1% (split equally between CGST and SGST, or entirely under IGST for inter-State transactions) based on the net value of taxable supplies, which is the gross value minus any returns. This potential reduction aims to alleviate the compliance burden on these operators.

The Council will further contemplate introducing a sunset clause for anti-profiteering cases, potentially setting an end date of April 1, 2025. Existing cases might be transferred to the Principal Bench of the GST Appellate Tribunal, following the Competition Commission of India’s (CCI) expressed inability to handle such cases. Initially, these cases were managed by the National Anti-Profiteering Authority before being transferred to the CCI.

Another significant agenda item is the review of the 28% GST imposed on online gaming, casinos, and horse racing, a decision ratified in the Council’s meeting on July 11 of the previous year. Despite resistance from certain states, the law was amended to clarify the GST applicability from July 1, 2017, leading to a surge in show-cause notices. The gaming industry has contested these amendments as retrospective, despite the government’s stance that they are clarificatory.

These deliberations reflect the GST Council’s ongoing efforts to refine India’s taxation framework, balancing the need for stringent compliance with the practicalities of business operations. The outcomes of this meeting will be pivotal in shaping the future landscape of GST regulations in the country.

In an illuminating development for India’s fiscal landscape, a recent survey by Deloitte reveals a remarkable surge in confidence towards the Goods & Services Tax (GST), with 84% of respondents expressing positive sentiments in 2024, up from 72% in 2023. This data surfaces as the GST regime approaches its seven-year milestone, underscoring a significant maturation in India’s indirect tax framework.

Mahesh Jaising, Partner and Leader in Indirect Tax at Deloitte India, articulates, “The optimistic outlook is indicative of enhanced supply chain efficiencies, technological advancements, and consistent stakeholder engagement in GST policy. This sentiment paves the way for essential reforms, aimed at fortifying the regime’s robustness, dynamism, and responsiveness to taxpayer needs.”

Jaising further advocates for a comprehensive GST 2.0 overhaul, proposing the expansion of the tax base, rationalization of tax rates, elimination of Input Tax Credit (ITC) restrictions, liberalization of export services, and measures to unlock working capital. Addressing these operational compliance issues could significantly uplift the fiscal landscape.

Conducted in May, the survey engaged top-tier executives across diverse sectors via online platforms, encompassing 760 responses. Industries represented included consumer goods, energy, resources, industrials, life sciences, healthcare, technology, media, telecommunications, banking, financial services, and public sector entities. The 40-question survey, comprising multiple-choice and single-choice queries, aimed to gauge the industry’s stance on GST’s impact on business operations and regulatory compliance.

The survey’s findings spotlight critical reform areas, including the rationalization of tax rates, establishment of an efficient dispute resolution process, removal of credit restrictions, adoption of faceless assessments, liberalization of export regulations, and the implementation of a compliance rating system. These recommendations are anticipated to be focal points at the forthcoming GST Council meeting on June 22.

Among C-suite leaders, 88% identified audit and assessment challenges as areas necessitating ongoing simplification, technological integration, and capacity building. A significant 91% endorsed extending audit timelines to enhance issue resolution and compliance. Additionally, over 70% of respondents advocated aligning GST appeal pre-deposit requirements with pre-GST norms to streamline dispute resolution processes.

Supporting the Micro, Small, and Medium Enterprise (MSME) sector, the survey underscores the need for simplified GST registration through virtual verification and standardized documentation nationwide. Such measures could alleviate compliance burdens for MSMEs, bolstering their contributions to India’s economic growth.

An encouraging 78% of MSMEs expressed positive sentiments towards GST implementation in 2024, a notable increase from 66% in 2023. Furthermore, nearly 70% of respondents affirmed that quarterly return filings enhance compliance for MSMEs, with supply chain efficiencies highlighted as a key benefit by 70% of MSME respondents.

“MSMEs are calling for key initiatives such as paperless invoicing and uniform registration guidelines to significantly ease compliance burdens,” Jaising notes. “Challenges with the matching concept have seen a substantial reduction, from 64% in 2023 to 37% now, indicating improved streamlining in this area.”

As India looks forward to the next phase of GST evolution, these insights from Deloitte’s survey offer a comprehensive roadmap for fostering a more efficient and equitable tax system, driving sustainable economic growth.

In a significant legal development, the Division Bench of the Kerala High Court has issued a stay on the lower GST ruling for Malabar Parota. This stay comes as a response to the single-judge bench’s earlier decision, which had reduced the GST rate for the product.

The interim order, articulated by Justices A. Muhamed Mustaque and S. Manu, suspends the previous judgment for two months. This period allows for further examination of the case, following an appeal lodged by the State Government. Notices have also been dispatched to the involved parties, including the manufacturer, the Central Government, and the Central Board of Excise and Custom (CBIC), with the next hearing scheduled for July 17.

Earlier this year, Justice Dinesh Kumar Singh of a single-judge bench ruled in favor of Kochi-based Modern Food Enterprises, positing that if the key ingredients (cereals, flour, starch, etc.) and preparations for products are comparable, it is unjustifiable to exclude one product from a reduced tax category. This ruling hinged on HSN code 1905 of Chapter 19, which delineates GST rates for products like pizza, bread, khakhra, and plain chapati or roti, asserting eligibility for a 5% GST rate or exemption.

The single-judge bench’s April 2 ruling contended that the petitioner’s products should attract a 5% GST (2.5% CGST + 2.5% SGST), rather than 18%. Modern Food Enterprises, the manufacturer of ‘Classic Malabar Parota’ and ‘Whole Wheat Malabar Parota’, had previously approached the Authority for Advance Rulings (AAR) seeking clarity. However, the AAR determined an 18% GST rate was applicable, asserting that the products did not qualify for the bread exemption.

Dissatisfied with the AAR’s decision, the company sought recourse from the Appellate Authority for Advance Rulings (AAAR). The AAAR upheld the higher tax rate, reasoning that products under subheading 1905, which include bakery items in ready-to-eat form, did not apply to Malabar Parota. This product requires heating or further preparation before consumption, distinguishing it from other bakery goods.

Following this, Modern Food Enterprises contested the AAAR ruling in the High Court. The single-judge ruling favored the manufacturer, invalidating the AAAR and AAR’s conclusions. However, the division bench now asserts that more deliberation is necessary, resulting in the current interim stay on the lower GST rate.

This ongoing legal tussle underscores the complexities of GST classifications and the need for meticulous judicial scrutiny to ensure equitable taxation policies.

The GST Council is poised to recommend alleviating measures for sectors beleaguered by the Inverted Duty Structure (IDS), including textiles, fertilizers, and leather. This structural anomaly, where input duties surpass output duties, precipitates a significant accumulation of input tax credit (ITC), imposing onerous cash flow constraints on businesses.

The pressing issue of IDS, which has long been a source of contention due to the complexities of refund calculations and ensuing litigations, is currently under rigorous scrutiny. The Group of Ministers (GoM), led by Uttar Pradesh’s Finance Minister Suresh Kumar Khanna, is tasked with devising rate rationalization strategies. Although their final report is pending, their interim recommendations from June 2022 advocate for measures to mitigate IDS in select sectors. The interim report highlights that the inability to refund accumulated ITC on services and capital goods escalates supply costs, thereby diminishing the competitiveness of Indian manufacturers against foreign imports. This blockage also incentivizes tax evasion and hampers India’s export market position.

The Committee posits that rectifying IDS would enable domestic manufacturers to fully utilize their tax credits on inputs, alleviating the consumer burden and enhancing the manufacturers’ operational viability. Despite withholding recommendations on items like utensils, tractors, and certain agricultural implements, the Committee anticipates providing clearer guidance, particularly regarding refund policies.

Harpreet Singh, Partner at Deloitte India, observes that previous GST Council attempts to address IDS by elevating GST rates on outward supplies have met with mixed reactions. While such increases aim to balance societal benefits and support consumer sectors, the approach has faced industry resistance. Consequently, the Council might now consider rectifying IDS in a manner that judiciously balances the interests of taxpayers and consumers alike.

Ankur Gupta, Practice Leader (Indirect Tax) at SW India, suggests several pragmatic solutions. Lowering GST rates on inputs to align them with finished product rates would curtail ITC accumulation and streamline credit flows within the supply chain. Another strategy involves rationalizing tax rates across raw materials, intermediates, and finished goods to establish an equitable tax framework. Additionally, expanding refund eligibility to include input services and prioritizing sector-specific relief for heavily impacted industries, such as textiles and fertilizers, could further ameliorate the IDS burden.

By adopting these measures, the GST Council could foster a more balanced and efficient tax structure, ultimately enhancing the global competitiveness of Indian manufacturers and ensuring a fairer distribution of tax burdens across the supply chain.