The evolution of the GST is a quintessential Indian reform story. Countries have taken more than a decade to get it right.
Citizens need to be a bit more patient.
When the goods and services tax (GST) was launched in July 2017 after the momentous midnight session of Parliament, it sought to end the tyrannical complications of the then existing indirect tax architecture. The system was a mess with cascading tax on tax and an array of taxes, 17 of them, including excise, customs, service tax, octroi and so on.
There was a broad welcome to the new regime, except for a few sceptics. The 20 per cent reduction in waiting time at inter-state borders was touted as one of the visible successes. Hitherto un-taxed companies started paying taxes.
From then to now, GST has evolved the zigzag way. While many businesspersons are annoyed with the glitches, the pundits are impatient to get to the Singaporean level of one tax, pronto. The tax administrators for their part have been over enthusiastic in recovering dues in a system that is new, earning a reputation of being ‘tax terrorists’.
The GST has brought into its fold about 1,300 goods and 500 services in five tax buckets — 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent. As the GST evolved, goods moved across tax rates bringing an element of uncertainty. The highest slab of 28 per cent, which had 230 goods initially, has only about 37 goods now.
This has made the back-end IT system cumbersome. At the same time, cess was added to ‘sin goods’ such as tobacco and luxury cars, taxed at 28 per cent, further complicating the structure. The biggest complaint was on the input tax credit not being credited on time, due to the mismatch between the notional amount on which it is claimed and the actuals filed through other partner vendors.
Also, our lawmakers tried to bring in progressiveness to the indirect taxation as well. To explain further, direct taxes are considered progressive — the more fortunate ones pay more than the low-income citizens.
Indirect taxes are inherently not progressive — a farmer and a millionaire that buys a packet of biscuit ends up paying the same tax. To bring progressiveness to indirect taxes and also get buy-in from the public for the GST, the council placed essential items such as milk and basic food items in the 0 per cent bracket.
Also, when the GST was promulgated, smaller firms with turnover of less than Rs 20 lakh were left out with the intention of protecting them from the initial hassles. But now that benevolent move has backfired because bigger companies are now not procuring goods from them since they cannot claim input tax credit.
To incentivise the states, not only were the states promised compensation until June 2022 for the shortfall (below a 14 per cent growth of tax revenues), the rates were kept low as well. The revenue neutral rate calculated at the time of GST coming into force is 15 per cent-15.55 per cent.
Now the effective GST rate is around 11.5 per cent. Also, more than 80 per cent of the goods were placed in the 18 per cent or below slab over a period of time. The extra burden was borne by the central government.
Now, the states, mostly the non-Bharatiya Janata Party-ruled ones are up in arms that the Centre has broken the promise — non-payment of dues of the last two months. As they say, only when the water flows low, the rocks are exposed. The issue has come forth because the shortfall due to low tax rates got exacerbated with a slowdown in the economy.
The nominal economic growth rate assumed in the budget was 12 per cent when the actual will be more towards the 7 per cent mark. The government has already crossed the fiscal deficit target of Rs 7 lakh crore for this financial year. Monetary policy rate cut of 135 basis points (bps) has resulted in only a 86 bps drop in government bonds, perhaps anticipating a larger than expected fiscal deficit.
Tax collection stand at Rs 6.8 lakh crore at 41 per cent of the target of Rs 16.5 lakh crore. Analysts at investment firm Jeffries are pointing to shortfall of about Rs 3 lakh crore. The conundrum before the Finance Minister is whether it is prudent to raise taxes in a slowing economy?
Normally, it calls for the opposite — a fiscal expansion through a tax cut or increased spending from the government. The state governments are crying wolf claiming that their hands are tied and that they are not allowed to spend in a slowing economy. Complicating the situation is the Reserve Bank of India’s (RBI’s) obstinacy in not easing interest rates. With the monetary tap closed, the burden is on the governments to act.
The only way out seems to be more borrowing and disinvestment. The government must take a re-look at the sovereign bond idea and raise money at low rates. It is also fast tracking the disinvestment plans. The fiscal deficit target will perhaps be allowed to ease to a more reasonable rate of around 4 per cent.
GST collections hit back the Rs 1.03 lakh crore mark in November propelled by the festive spending after failing to pass the Rs 1 lakh core mark for the four previous months. The government has taken measures to tackle non-compliance. The GSTR Form 3B has to be submitted every month by merchants.
There are about 21 lakh GSTN IDs in India of which 3.5 lakh IDs registered some kind of activity in September and October but did not fill out the forms. The authorities have gone ahead to disable e-way bills for their products, without which they will not be able to transport items legally.
India has to drastically improve its tax to gross domestic product (GDP) ratio. The combined state and central taxes to GDP stands at around 17 per cent, at half of 34 per cent benchmark of the Organisation for Economic Co-operation and Development (OECD) countries.
When the economy starts recovering, the rationalisation of rates can begin, as proposed by many analysts, by having three rates instead of the current five and slowly moving to one rate. Other countries with GST have one rate for all goods and services — in Canada the rate is 13 per cent, Australia at 10 per cent and Singapore at 7 per cent.
Also, the state governments should use this opportunity to initiate reforms in their own states. As the Chairman of Prime Minister’s Economic Advisory Council, Bibek Debroy pointed out, many top states such as Kerala, Tamil Nadu, Rajasthan, West Bengal are growing at less than 7 per cent. There are many issues in the state list and the concurrent list on which states can enact reforms.
For example, reforms in land acquisition or reforms in agriculture (like the recent Tamil Nadu contract farming law) could be done to attract investments and boost revenues. States can also disinvest from state government-owned companies and trim bureaucratic expenses. The myth that growth flows solely from North Block in New Delhi should be busted.
Countries have taken more than a decade to get it right. Citizens need to be a bit patient with GST. India’s overall tax regime is being overhauled and modernised. Under direct taxes, corporate taxes were cut to 22 per cent recently. On the personal taxes front, the new Direct Tax Code if put in practice will result in a simplified, lower tax regime.
The Fifteenth Finance Commission has submitted its recommendations that will come into force from April 2020. One has to see whether the tax devolution from Centre to states remain unchanged. Also, as N K Singh, the Chairman said that the Finance Commissions of the future and GST Councils should partner more in setting pragmatic tax goals that serves both the state and the Centre.
In laying out the GST story, one has to understand that reforms happen in India in a messy manner. We could not have gone from a complicated tax system to a one-tax GST immediately. It is the nature of our federalism and democracy that we take the slow scenic route. Also, when conditions, both political and economic, alter, they introduce unknown variables to the process.
The arc of the reform in India is long but it bends towards modernity. Thus, the evolution of the GST is a quintessential Indian reform story.