GST's identity crisis: One nation, multiple headaches

Time of India

2 days ago

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Rajesh Sodhi still remembers the night of June 30, 2017. The Ludhiana-based textile manufacturer had stayed up past midnight, watching Parliament TV as the Goods and Services Tax (GST) was announced. 'One Nation, One Tax' was the clarion call. It sounded like music to his ears.Eight years on, Sodhi's enthusiasm has morphed into frustration. His factory now employs three accountants just to handle GST compliance . "We were promised simplicity," he says. "Instead, we got something more complicated than what we had before."Sodhi's story isn't unique. Across India, individuals and corporates alike are grappling with a tax framework that seems to have developed a mind of its own.The complexity starts with the basics. Instead of 'One Tax', today's GST comes with five different tax rates: 0%, 5%, 12%, 18%, and 28%. Add in numerous exemptions, differential rates for services, and sector-specific rules, and you have a system that's making the old tax regime look simple.Take something as basic as determining which rate applies to popcorn, which is still a hot-button issue months after the December 2024 GST Council meeting. Is it taxed at 5%, 12%, or 18%? The answer depends on factors so nuanced that even tax lawyers disagree, but the lowdown is: it's 5% if sold loose (such as in a movie theatre), 12% if packaged and savoury-flavoured, and 18% if caramelised. But if your popcorn comes bundled with your movie ticket, the GST would be 18% because this would be treated as a composite supply.Complexities such as these have prompted entrepreneurs and companies, regardless of industry, to reclassify their products and services after routine audits, resulting in demands for additional tax ranging from lakhs to crores of rupees."There has to be a philosophy to taxation that informs decision-making. GST is far from the good and simple tax it was supposed to be," says former Finance Minister (FM) Yashwant Sinha. "When I was FM, I rationalised the multiple central excise rates down to three. GST has a rate multiplicity problem. It's creating classification, implementation, and filing issues. The slabs must be reduced— ideally to one."The digitalisation of the Indian economy has revealed another vital limitation in the implementation of GST. App-based services, digital payments, and e-commerce platforms have created a whole new category of tax disputes that the system wasn't designed to handle.In Karnataka, vendors are protesting after having received GST notices for UPI-based transactions exceeding ₹40 lakh a year. They are currently demanding that the state revoke such notices, and that enforcement of such rules be relaxed for small-scale traders.Also consider fintech entrepreneurs whose lending platforms are embroiled in disputes over whether algorithmic credit scoring should be taxed as a software solution or a financial service, a distinction that could mean the difference between 0% and 18% tax rates. Software as a Service (SaaS) companies are unclear and thus unable to determine whether they're selling goods or services. There's confusion over e-commerce platforms' marketplace versus inventory models, and skill-based online gaming companies are still contending with the massive retrospective demands rising from the hike from 18% to 28%, on par with chance-based activities such as gambling and lotteries.Then there's the 'luxury' classification. As Aarin Capital Chairman and former Infosys executive Mohandas Pai puts it:"Air conditioners and TVs larger than 32 inches are taxed at 28%, but these aren't luxury items. They're mass goods today. Two-wheelers and sedans are also not considered luxury goods in 2025. Cement, which is critical for building India, also falls in the 28% bracket. The number of slabs should be reduced, and classifications revised."A concern on GST's complexity is the volume of disputes it has generated. There were significant judgments pertaining to GST in 2024, rendered by High Courts across the nation. And 2025 is even busier, as evidenced by recent developments.One, multinational corporations across sectors have taken the international arbitration route to seek relief from retrospective tax claims. Several disputes are ongoing. Two, online real money gaming platforms are challenging retrospective GST notices amounting to ₹1.12 lakh crore, which exceed the industry's turnover of approximately ₹20,000 crore. The Supreme Court heard their arguments on July 15 and has scheduled its final hearing for July 25. Three, food delivery aggregators are wondering whether delivery charges attract 5% or 18% GST, which could further dent make or break their razor-thin margins. Four, airlines and shipping companies were mired in compliance issues around 'place of supply rules' that confused rather than clarified. Lastly, life and health insurance companies contended with 18% GST, a move that was passed on to already-burdened consumers.Such cases highlight that retrospective tax actions, especially those related to indirect taxes like GST, may impact not only compliance but also business models.The overall "pay first, argue later" approach is also a hurdle for micro, small, and medium enterprises (MSMEs), which have minimal resources, including cash flows, to sustain specialised tax compliance teams. And the paperwork doesn't help. This includes mandatory multi-factor authentication for GST portal access and restrictions on E-Way Bill (EWB) generation to curb fraudulent practices, which have added yet another layer of complexity to daily operations. As Rajesh Sodhi, the entrepreneur from Ludhiana, says:'Tax refund delays are my biggest problem. I'm spending most of my time on GST-related tasks. I became a businessman to sell hosiery and other textiles, not to become a tax expert. But that's what this system has forced me to become."Although India's foreign direct investment (FDI) performance has shown resilience, recent data indicates moderation in investment momentum. In FY25, net FDI inflows dropped to a record 96.5%, as reported by The Economic Times. This has everything to do with investors exiting lucrative IPOs here and Indian firms ramping up overseas investments. But here's something to consider: the retrospective application of tax laws also undermines the principle of legal certainty, which is critical for investor confidence. Such enforcement imposes additional due diligence requirements and risk assessment protocols on foreign investors, particularly in sectors with complex supply chains and cross-border transactions.The Financial Times reported that disputed tax demands, totalling around ₹13.4 lakh crore (as of March 2024), may have contributed to the decrease in net FDI inflows. Automaker Volkswagen is contesting a tax demand of approximately ₹12,000 crore related to import duties stemming from a 12-year investigation. Similarly, Maruti Suzuki (~₹20,000 crore) and Hyundai (~₹4,000 crore) are also among the top companies. Such prolonged battles and uncertainty surrounding tax obligations could raise concerns among investors about the predictability of India's tax policies.There are signs that policymakers are finally acknowledging pain points. Owing to Budget 2025, enterprises can expect some GST rate rationalisation in the 56th GST Council meeting, to be held later this month. Two major measures reportedly being considered are the elimination of the 12% slab and the abolition of GST altogether for term insurance.But for businesses like Sodhi's, the question isn't whether reforms will come. It's whether they'll arrive soon enough. After eight years of promises and patches, India's entrepreneurs are running out of patience with the great tax experiment.The answer, it seems, is written in the stars… or perhaps in the next GST Council meeting.