GST yet to turn into single-point levy system
The Goods and Services Tax (GST) regime has now been in existence for five years. It reached this milestone on July 1. It is an apt occasion to look back on the outcome of a historic tax reform that had been long awaited as the panacea for all the ills of the indirect tax system. It took a long time to ultimately take off from the point that the idea began to be seriously considered in 1999. It was the then Prime Minister Atal Bihari Vajpayee, at the behest of his Economic Advisory Council, who set up a committee headed by then West Bengal Finance Minister Asim Dasgupta to prepare a plan for the proposed single-point tax. It took another 18 years for the tax regime to be ultimately launched by the NDA government in 2017.
Despite the prolonged delay in launching the ‘miracle tax’, there was much criticism of the decision to introduce it in mid-2017. The feeling was that not enough preparation had been done for introducing the radical new levy. Plus it came on the heels of demonetisation in November 2016 which had wreaked havoc on the economy. There was a widespread view that the timing of the big bang economic reform was all wrong.
On the other hand, it’s a given that there would never have been a perfect moment for launching such an overhaul of the indirect tax system. Its introduction along with the digital ecosystem which it heralded for the business community would have been a culture shock at any point of time. It would be naive to suggest that the bulk of small and tiny businesses that had to adapt to the new tax would have been somehow more prepared to deal with the shift to computerisation of accounts and online transactions after a few more years.
There is also the argument that more delay may have helped in ensuring that the GST Council and indirect tax authorities did not impose a plethora of regulations. These had to be revised and simplified for months after the launch. Again, this process would have been inevitable whenever the new tax was brought into existence. Largely because the bureaucracy, especially tax authorities in this country are unable to think in terms of simplicity and clarity in tax laws. It is a mindset difficult to eradicate even when the goal is to reduce the previous complexity of multiple taxes by bringing in a single-point levy.
Despite all these glitches, there is no doubt the GST has had a fair share of success. It has definitely managed to ease the process of inter-state transport of goods and eliminated the long octroi queues at state borders. The introduction of e-way bills has helped in this direction and also enabled reduction of frauds in the system. At one stage, there was concern over stagnation in the monthly revenue collections which had dipped below Rs one lakh crore. But after the pandemic, there has been a consistent rise which is being attributed partly to the economic revival and partly to tax authorities’ efforts to reduce gaming of the system.
And now, what of the future for GST? The first goal should be to ensure that the existing avatar of a multiple level tax is altered to make it more in line with the original concept of a single-point levy. Currently, there are actually four types of GST — integrated GST which is imposed on inter-state supplies of goods and services, and then there is Central, State and Union Territory GST, imposed on intra-state supplies. In addition, there are four tax slabs ranging from 5 to 28 per cent. Both the types of GST as well as the tax slabs need to be compressed into a more compact system, ensuring that the average is revenue-neutral. In other words, there should be no loss of revenue compared to the pre-GST era. But much will depend on the states which are determined to get compensation for losing control of their previous tax revenues.
Right now, the tussle in the GST Council is over extension of the five-year period set for giving compensation to states via a cess for this purpose. With Covid having created economic chaos for over two years, states have a legitimate case for demanding compensation for yet another five years. A decision has yet to be taken but it seems that this crutch may be needed to help balance state finances in the medium term.
The second goal should be to bring the two cash cows for both Centre and states into the GST fold — petroleum and alcohol. Both were kept out of it in anticipation of the fact that revenues from these goods needed to be garnered directly by Central and state exchequers. Bringing alcohol can be deferred a while longer but the time has come to include crude and oil products into its ambit. Currently, input tax credit is not available when these are used as an economic activity. Besides, the Centre is using its power to levy a cess both on domestic crude output and export of petroleum products. Since revenue from a cess goes directly into the Centre’s coffers, the states have a justifiable grievance that they are being excluded from much-needed revenue inflows.
It would thus be in the fitness of things for petroleum to be brought under the auspices of GST and ensure a more equitable distribution of revenue from this sector. In fact, the Central government has in the past maintained that it is in favour of bringing oil products into the GST regime and it is the states that have resisted the move. It is time to test the veracity of these claims.
The original concept of GST as a single-point levy was expected to raise GDP growth by as much as one to two per cent. This has certainly not taken place. But then, realistically, the tax is far from the original concept of a single levy and has many layers in its actual implementation. Unless these layers are stripped away and the tax is made simpler and more rational, as it was originally meant to be, it cannot become a spur to economic growth.
