Consensus on GST revenue at stake

Sushma Ramachandran

Senior Financial Journalist

The launch of the Goods and Services Tax (GST) in 2017 was hailed as a path-breaking economic reform that would pave the way for ease and simplicity of taxation throughout the country. This was to be the end of long queues at borders as trucks waited for octroi clearances and the end of multiple taxation as many levies were subsumed into a single-tax nationwide system. Well, the reality was not as ideal as envisaged initially.

The GST, which took 17 years to come to fruition, ended up being a multi-layered tax, with states ensuring that they got their pound of flesh in terms of compensation for losing out on their own levies. It also took years to stabilise and the shift to digital payments meant that small traders and businesses struggled to cope with the demands of a bewildering new world of computerisation.

There is no doubt that it expanded the scope of the organised sector as even tiny businesses ended up getting attuned to paying taxes digitally. But this was possible only after the GST Council and the implementing agency, the Central Board of Indirect Taxes, made repeated changes to simplify the complex rules and regulations.

Besides, the new tax was launched less than a year after the demonetisation process, creating more chaos for small businesses that were just getting back on their feet. At the time, a textile trader from northern India told me that both textile and garment industries had collapsed due to the introduction of the GST and even warned darkly that they would never revive.

Five years down the line, the GST is being seen as a success story, especially as revenue collections rapidly picked up pace after the rigours of the pandemic in 2020 and the disastrous second wave in April-May, 2021. Monthly collections have crossed Rs one lakh crore for the past nine months, giving healthy returns to both the Central and state governments. In fact, the five-year period stipulated to give compensation to states for their loss of revenues due to the GST is coming to an end next month.

But many changes are still needed to convert the GST into a single-point tax meant to boost the GDP growth.

First, there is a need for one tax instead of the existing ones, known as integrated GST, state GST, Union Territory GST and Central CGST.

Second, the number of tax slabs needs to be cut down.

Finally, two key commodities — petroleum products and alcohol — need to be brought into the GST fold. These are cash cows being jealously guarded by both the Centre and states. The current finger-pointing over high oil product taxes between the Centre and states stems from this reluctance to move towards the GST regime.

It is at this stage, just when it seemed the GST systems were poised for an improvement, that the future has suddenly become uncertain. The Supreme Court has ruled on an order related to tax on ocean freight supporting the Gujarat High Court verdict calling the levy unconstitutional. But the SC has gone a step further and commented that the GST Council’s recommendations are not binding on the states and only have a “persuasive” value.

This does not intrinsically alter the existing legislative framework for the GST, as government officials have pointed out, but it will surely embolden the states, especially those ruled by the Opposition, to take a more independent line on accepting the council’s decisions on taxation.

Technically, even now, these decisions are recommendatory, but so far, the states have been implementing the decisions without any change as the council functions by consensus. In other words, the states are actually participants in the decision-making.

But with the SC having articulated that these decisions are only of a persuasive nature, it has to be seen if the states would now seek to overturn them. In other words, would they like to shift commodities from a lower five per cent slab to a higher one in opposition to the council’s decisions? This would mean that commodities would be taxed differently in different states, thus defeating the concept of a single nation, single tax.

The finance ministers of Tamil Nadu and Kerala have welcomed the court’s ruling, indicating that they might be thinking on these lines. The complaints are that the ruling party is able to push through its proposals as it has more chief ministers in its fold. The Centre, undoubtedly, has a higher weightage in voting in the present system. Its vote comprises a one-third share in the total voting, though decisions are taken based on three-fourths of the total weighted votes.

But in actuality, voting has taken place just once. Otherwise, all decisions have been based on consensus. This healthy tradition potentially faces a setback after the court ruling.

The system was set in place by the then Finance Minister Arun Jaitley with the aim of ensuring that everyone is on board as revenue is a crucial issue for all states. Following the latest ruling, the Centre needs to make greater efforts towards consensus-building rather than trying to push through decisions with the help of the NDA-ruled states. This would be counter-productive, especially at a time when the states are conscious that the time-table fixed for regular compensation comes to an end next month. Worries of revenue inflows are bound to be uppermost in the minds of most state finance ministers right now and any fears need to be allayed quickly.

At the same time, states also need to be more fiscally responsible. The idea of fiscal federalism and ensuring that the Centre and states work in harmony on the taxation front can only succeed with efforts on both sides. It has to be recognised that the bonanza from the higher GST revenues accrues to the exchequers of both the Centre and states.

So, despite the SC ruling, it would be in the long-term interests of both to avoid confrontation on tax issues and help make the concept of “one nation, one tax” a reality. This would entail giving up control over both alcohol and petroleum products, along with reducing the number of GST slabs. These are the much-needed reforms that will make the single-point tax more efficient while achieving the aim of buoyancy in revenues. 

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