Context: On the third anniversary of the passage of Goods and Services Tax Bill in the Parliament, its promise is mostly unfulfilled. Was something wrong in the original design, or has it failed in its implementation? It is a bit of both.

About GST Act, 2017

  • The Centre will levy and collect the Central GST.
  • States will levy and collect the State GST on the supply of goods and services within a state.
  • The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services, and apportion the state’s share of tax to the state where the good or service is consumed.
  • The Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST for five years consecutively from 2017.

Desired objectives of GST: Launched on 1 July 2017, GST was advertised as a single tax for one nation, a move that would support national integration and give the economy a fillip. 

  • One principle behind taxes: GST is designed on the principle that a tax that attracts penalties for non-payment must be easy for taxpayers to grasp. 
  • Good and simple tax: It aimed to subsume a mesh of indirect taxes levied by the Centre and various states.
    • The state rules varied so widely from one state to another that it took a lot on part of businesses to calculate their liability.
  • Better tax collections, efficiency and competitiveness.

Achievements so far: The GST was expected to raise efficiency and lower final prices, a goal which it has achieved partially.

  • Taxes compliance: It stopped a cascade of taxes upon taxes which pushed up costs all along supply chains. 
  • Easy compliance: The GST put an end to much of the earlier compliance problems for businesses. 
  • Tax evasion reduced: GST removed check posts at state borders, and put a closure on cross-border tax arbitrage.
  • Input benefits: Since the GST was only applicable to value addition, many enterprises have gained from tax credits for taxes already paid on inputs. 
  • The GST Council functions quite democratically, meets often, and takes reasonably fair and quick decisions. 

Early challenges: 

  • Glitches due to its network: The ambition of matching every invoice with every transaction in real-time was difficult due to the poor network connectivity in the country. 
  • Hasty implementation of GST: Sourcing from MSMEs took a hit as bigger companies preferred to purchase from suppliers who could provide GST receipts. Entire supply chains were disrupted.

Failures so far:

  • Non-simplicity: In only three years, some 500 items have seen rate tweaks. In all, we have at least seven confusing GST slabs now. This defeats the canon of simplicity. 
  • High tax rates on automobiles, and building and construction material caused further slowdown in these sectors.
  • By excluding petroleum products, real estate and electricity, 40% of the internal indirect taxes at the Centre as well as states are not in the net.
  • The originally proposed three forms, GSTR-1, GSTR-2 and GSTR-3B, could not be operationalized.
    • The GSTR-3B form is a makeshift arrangement for reconciliation, but a more robust long-term solution is needed. 
  • Uncovered economy: Large parts of the economy remain outside the GST net, belying the concept of “one nation, one tax". 
  • No single slab rate: India follows the progressive taxation concept in which the rich must bear a heavier burden than the poor, and so a single-rate GST was not feasible. 
  • The bureaucratic tinkering with rates: The most recent example is that of packaged parotta being levied 18% GST, whereas its north Indian cousin, the parantha, is taxed at 5%. Such arbitrariness has resulted in confusion, uncertainty and litigation.  
  • Falling tax revenues: In 2018-19, tax revenue was short by about ₹1.5 lakh crore. The revenue shortfall for the Centre for 2019-20  will be even larger than last year — around ₹2 lakh crore.
  • Relatively high rates have made both industry and services less competitive, especially in comparison with their international peers. 
    • India’s dismal export performance in the past few years can be largely attributed to the burden of delayed GST refunds and an overvalued exchange rate. 
  • Non termination of the anti-profiteering authority: It was set up to prevent undue profiteering (left undefined) by producers that did not pass on the benefit of lower taxes to consumers. Many companies have been fined under this clause. It was supposed to end within two years. But it's still there.
  • Inverted duties: Since costs like electricity and fuel are not included in the GST net, and hence are not eligible for tax credits. The country thus also has a problem of incomplete GST coverage across the economy.
  • No higher growth, nor tax buoyancy, nor much lower prices for products and services, which was a key GST promise. 
  • The E-way bill, designed for frictionless inter-state commerce, is still far from functioning smoothly. 
  • Large discrepancy between GST filing and final returns which points to systemic flaws. 
  • Threshold turnover: The fact that a large number of businesses below a threshold turnover have been exempted compounds the problem of a fractured tax system.
  • Mythical “revenue neutral rate", or RNR: Since everything was pegged to this rate, the entire GST system drifted far above the 12% rate envisaged in the original tax reform reports of 2001-02. 
    • The GST Council cannot undertake drastic and fundamental reforms to correct some of the birth defects of GST (such as RNR). 
  • Delayed compensation promised to states: A uniform and rosy rate of 14% growth in GST revenues for the first five years was a serious error. 
    • It gives states no incentive to make tax efforts of their own. 
    • Nor does it make an allowance for an economic downturn like the covid crisis. 
    • And the GST compensation cess is almost taken up by the Centre. So, compensation to states is inadequate, or delayed, or both. 
  • Restructuring of taxation would affect fiscal calculations. Already there is a lot of fiscal pressure due to Covid-19 crisis. 
  • Alcohol and petroleum: The states remain addicted to special levies on these to fill their coffers. It creates hindrances in achieving single GST slab.
  • Other factors such as the banking sector woes, stagnant investment and business confidence that have caused the downturn.

Way forward: At a time when the economy needs a massive fiscal stimulus, it would be advisable to cut the median GST rate to 12%, widen the tax net to include petrol, diesel and electricity, correct the inverted duties, and remove the multiplicity of slabs. This would be the best way to celebrate three years of GST.

  • One rate: A basic GST rate held steady over the years would signal policy stability 
    • Most goods and services should be covered under a single rate leaving “merit" items under half that rate and a few unhealthy or luxury purchases under twice the rate. 
    • The merit and “demerit" categories should be well chosen.
  • Petroleum and Alcohol: Ideally, alcoholic drinks and petroleum products should be under the GST net, by fixing switchover targets in due course of time. 
  • Technical solutions: A range of technical glitches need to be fixed as well. The software systems in use are too complex for individuals and modest businesses, and input credits are hard to get. 
  • Removing arbitrariness: The element of discretion needs to be done away with.

The GST system clearly needs an overhaul, and it would be better to do it now, while tax revenues are in flux, than risk further disruption once the economy recovers.