After the Budget, FM should focus ironing out the wrinkles in GST

After the Budget, FM should focus ironing out the wrinkles in GST
Courtesy: Getty Images

India’s goods and service tax has too many rates and too many exemptions. As a result, it has not been able to live up fully to its promise. With revenues showing a buoyancy over the past few months, this may be the right time to roll out an improved GST 2.0.

Though the Goods and Service Tax (GST) does not come within the remit of the Union Budget, this may be the right time to consider reforms in this indirect tax to align it completely with India’s ambitious growth trajectory. It is also high time for the GST Council, chaired by Union Finance Minister Nirmala Sitharaman and comprising the finance ministers of all the states and Union Territories, to do away with the multiplicity of slabs that currently exist and telescope them into two or three rates.

GST has now been in force for about four years. It was enacted in 2017 to do away with a welter of 23 different Central and state taxes and bring all of them under the umbrella of one tax to increase ease of compliance, step up collections and help improve the ease of doing business in the country.

After declining during most of last year when the country was under lockdown, GST collections have shown a growth trend in October, November and December year-on-year.

Time to iron out the wrinkles

Some forward movement is visible in these directions but it will be fair to say that all of these remain works in progress. That is why industry associations, foreign investors and economists want a thorough review of the developments to data. The goal: Iron out the remaining glitches and roll out GST 2.0 that can take the economy to the next level.

The time now is particularly propitious. After declining precipitously during the last calendar year when the country was under lockdown, GST collections have shown a consistent growth trend in October, November and December year-on-year.

Tax collections show rising trend

Though some economists have attributed the increase in GST collections, which can be said to be a proxy for consumption demand in the economy, in October and November to festive season and pent-up demand, the December collections, which rose 11.6 per cent to an all-time high monthly figure of more than $15.7 billion does seem to indicate that the economic turnaround could be sustainable.

But behind these optimistic headlines, there are some problems that remain in the fine print of the tax. For one, there are too many rates – 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent, plus a cess on certain categories of goods.

Countries where GST have been successful have three rates – a lower rate for essential goods, a mean rate and a higher rate for luxury goods. That is the way India, too, must go.

This leads to disputes over classification and the applicable rate, creating scope for manipulation and corruption. It has also led to a slight increase in prices of some items. It has also increased the cost of compliance for almost all assesses, and in the case of many small taxpayers, prohibitively so, many tax experts aver.

GST has lived up to only part of its promise

The impact of GST is proving to be positive in the medium-to-long term as the cascading effects of taxes has largely been eradicated.
The impact of GST is proving to be positive in the medium-to-long term as the cascading effects of taxes has largely been eradicated.Courtesy: ANI

These outcomes are contrary to the vision set out at the time GST was unveiled, which had envisaged transparent rules and classifications, easier book-keeping and compliance burdens, cheaper goods and services for consumers and a boost to consumption from increased demand.

Then, if one goes by the examples of countries where GST rollouts have been successful, there are usually three rates – a lower rate for essential goods, a mean rate and a higher rate for luxury or sin goods.

That is the way India, too, must go. But the existing situation is, perhaps, understandable given the fact that decisions at the GST Council are usually taken by consensus. With so many different political parties in power in India’s 28 states and eight Union Territories, it is difficult to forge a consensus, especially as no government wants to risk the possibility of lower revenue collections as a result of lower tax rates.

Cascading effect

The impact of GST is proving to be positive in the medium-to-long term as the cascading effects of taxes has largely been eradicated. However, as the states are reluctant to let go of their power to tax electricity, oil & gas, alcohol and real estate, all of which are big sources of revenues for them, upstream and downstream sectors do not get the benefits of input tax credits.

This ensures that the cascading effect of taxes referred to above still has some residual impact on some very important sectors of the Indian economy. This prevents the economy from getting the full benefits of GST that other countries enjoy, thus, impacting the competitiveness of India vis-à-vis its peer nations.

Constantly upgrade technology

States are reluctant to give up their power to tax electricity, oil & gas, alcohol and real estate. As a result, upstream and downstream sectors do not get the benefits of input tax credits.

Over the past few months, several instances of fraudulent input tax credit claims have come to light. The authorities are taking necessary steps to clamp down on this practice. But this also points to the need to improve and upgrade the technological backbone of India’s GST system – and making greater use of artificial intelligence tools – so that such false claims are immediately identified and weeded out.

Prior to October, the last time monthly GST revenues crossed the $14-billion mark was February 2020. The resulting shortfall in collection led to bad blood between the Centre and the states and widened the trust deficit between states ruled by Prime Minister Narendra Modi’s BJP and those governed by parties opposed to him.

Time is ripe for reforms

Now, with revenue collections are looking up again, the states may be more inclined to risk reforms that promise a bonanza but with an element of risk.

Therefore, this may be the right time for Sitharaman and the GST Council to consider giving GST a smart makeover. Many experts feel this is a necessary prerequisite for India to move on to next stage of the growth ladder. Once the Budget is out of the way next week, the Finance Minister should turn her attention to this critical reform.

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