Challenges to the GST System in India

The Goods and Services Tax (GST) was introduced in India with the intent of creating a
unified tax system that eliminates cascading taxes and streamlines revenue collection.
However, despite its advantages, GST has presented several challenges across industries,
states, and businesses. Some of the major issues include disproportionate tax burdens, state-
level revenue concerns, and administrative inefficiencies.

1. Increased Tax Burden on Certain Industries

While GST has simplified taxation for many industries, it has also significantly increased the
tax burden on others. A striking example of this is the gaming industry in India. In July, a
group of ministers proposed that online gaming activities should be taxed at a flat rate of 28%
on the total contest entry amount, regardless of whether the game is one of skill or chance.
Traditionally, games of chance, such as betting and lotteries, are taxed higher than games of
skill, such as chess, rummy, or fantasy sports. However, under this proposal, both categories
would be treated the same for taxation purposes.

Moreover, the 28% tax is levied not on the platform fee but on the entire contest entry
amount. For instance, if 12 users participate in a game with a total prize pool of INR 1,000,
each player contributes INR 100, making the total collected amount INR 1,200. Out of this,
INR 1,000 is paid to the winners, while the platform retains INR 200 as its fee. Instead of
taxing just the INR 200 platform fee, the proposed GST structure applies a 28% tax on the
entire INR 1,200, drastically increasing the tax burden on the industry.

This has several consequences. First, the increased tax rate could discourage users from
participating in such games, leading them to offshore platforms where they can avoid
taxation. Second, investors who have contributed an estimated $3-5 billion to India's gaming
sector may withdraw, fearing instability and excessive taxation. Third, the gaming industry—
especially skill-based gaming—has been recognized as a legitimate business by Indian courts,
and equating it with gambling may stifle innovation and entrepreneurship in the sector.

2. Revenue Distribution Between Consumer and Producer States

Another major concern with GST is its impact on the revenue distribution between producer
states and consumer states. Under the GST framework, taxation is collected at the point of
consumption rather than production. This means that states where goods are consumed
receive the tax revenue, while states that manufacture and export goods lose out on a
significant share of tax collection.

For example, if a packet of potato chips is manufactured in Tamil Nadu and sold in Bihar, the
tax is collected in Bihar. If the Integrated GST (IGST) collected in Bihar is INR 12, then INR
6 is allocated to Bihar, while the remaining INR 6 goes to the central government. A portion
of the central share (approximately 42%) is then redistributed among all states, including
Tamil Nadu. However, this redistribution is insufficient to compensate producer states for the
investments they make in infrastructure, roads, highways, and ports to support
manufacturing.

Tamil Nadu, one of India's largest manufacturing hubs, has expressed concerns over this
revenue allocation model, arguing that it undermines the economic viability of production-
heavy states. To address this issue, the central government had initially introduced a cess and
promised compensation to states for their revenue losses for the first five years of GST
implementation (until 2022). However, the COVID-19 pandemic severely affected tax
collections, making it difficult to meet these commitments, leaving producer states in
financial distress.

3. Penalty Payments and Compliance Burdens

One of the most frustrating aspects of GST for businesses is the penalty system associated
with tax compliance. Even if a business regularly pays its taxes on time, it can still be
penalized if its supplier fails to remit their GST payments. In such cases, the business loses
the ability to claim input tax credit (ITC) on the relevant invoices, leading to unexpected
financial burdens.

This policy disproportionately affects small and medium enterprises (SMEs), which may not
always have the means to track their suppliers' compliance. Instead of directly penalizing tax
evaders, the GST system holds honest taxpayers accountable, creating an unfair burden on
compliant businesses.

4. Lack of a System to Revise Filings

Another critical issue with GST compliance is the inability to revise filings. Unlike income
tax returns, which allow revisions in case of errors, GST returns once filed cannot be
modified. This rigidity increases the risk of businesses making inadvertent errors, leading to
penalties and additional costs. Despite five years of GST implementation, a system for
revising filings has not been introduced, making compliance unnecessarily cumbersome.

https://www.financialexpress.com/business/industry-goms-proposal-of-28-
gst-black-market-will-thrive-fdi-will-be-hit-says-gaming-industry-2537900/

https://www.ey.com/en_in/insights/tax/impact-of-new-gst-law-on-skill-
based-online-games