Unveiling New GST Reforms For New India - Analyzing the performance of the GST till now and bringing in necessary reforms needed.
Background and need for reform
- The implementation of the goods and services tax (GST) in a large and diverse federal country ruled by different political parties is a remarkable achievement.
- With revenues stagnating from the GST bellying the expectations, it is an opportune time for the government to bring in the reforms.
- Almost all the 166 countries that have implemented GST in one form or the other have taken considerable time to stabilize the value-added tax.
- There is no ‘one size fits all’ GST which can be implemented readily.
- Often the reforms is carried out with a bad features to get it passed in the parliament.
- However, it poses formidable challenges to get it reformed at a later stage.
- This is a good time to analyse the revenue implications and economic impact of GST.
- In India, the tax has been evolving over the last 27 months.
- Need for Identification of reform areas- to increase revenue productivity and minimize administrative, compliance and distortion costs.
Benefits of the GST
- Ease of doing Business
- The abolition of interstate check-posts erected to enforce taxes on cross-border transactions.
- This has reduced impediments for interstate movement of goods, and helps to create a national common market.
- It is estimated that the long-distance travel time for goods transportation has reduced by almost 20%.
- Improvement in supply chain management
- It is no longer necessary to create branch offices merely to avoid interstate sales tax. Thus reducing red tapism.
- Parity among the states
- The abolition of interstate sales tax has made the tax destination-based and reduced inequitable interstate tax exportation.
- Enhancing compliance and transparency
- Equally important is the compliance gain due to linkage and exchange of information between income-tax and GST departments.
- Reduction in cascading taxes
- A major gain is the reduced cascading due to more comprehensive mechanism to credit input taxes against taxes on outputs.
- Earlier, the central excise duty was levied at the manufacturing stage and it cascaded into the final retail value.
- The inclusion of taxes like central sales tax, octroi, purchase taxes and luxury taxes on hotels in GST too has substantially reduced the tax on tax; mark-up on taxes; and tax on the mark-ups.
- Principle of cooperative federalism :
- The creation of GST Council is an important innovation in cooperative federalism.
- This has helped to minimize the transaction cost of reforming the calibration of domestic consumption taxes of the Centre and states.
Problems with GST
- Stagnant revenues
- For 2017-18, the Comptroller and Auditor General (CAG) of India’s report estimates that the central government part of GST actually declined by 10% for the subsumed taxes as compared to the previous year.
- The Budget Estimate for 2018-19 for the Central government was ₹7.43 trillion—the actual collection was 22% lower at ₹5.81 trillion.
- In 2019-20, while the estimated monthly collection of GST is ₹1.18 trillion, the average monthly collection during the last seven months has been less than ₹1 trillion.
- The government is thus staring at a shortfall of ₹2 trillion for the whole year.
Multiplicity of taxation
- The tax is levied at four different rates (at 5%, 12%, 18% and 28%) in addition to the special rates on precious metals (0.25%), gold (3%) and job work in diamond industry (1.5%).
- A special cess is also levied at varying rates on items under 28?tegory and, in the case of some class of automobiles there’s a cess of 22%, resulting in the total incidence of 50%.
- Multiplicity of tax rates enhances administration and compliance costs, enables misclassification and in some cases causes inverted duty structure.
Large Exemption list
- The decision to exempt almost 50% of the items in the Consumer Price Index basket has narrowed the base.
- Large-scale exemptions and low-compliance composition scheme up to ₹1.5 crore turnover has added to cascading.
- 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
Issue of fake invoices
- As the of the annual returns filing too is being repeatedly postponed, there is no viable means to match invoices and this has given rise to a fake invoice industry.
- 9,385 cases of tax fraud by this means have been detected involving an amount of ₹45,682 crore.
- The undetected amount would be much larger.
Dysfunctional technological platform
- It has resulted in integrated GST allocation in ad hoc and arbitrary ways and has caused delays in the refunds to exporters.
Increasing the threshold
- First, the threshold for registration is kept at a reasonably high level.
- The international experience recommends the threshold at about $100,000, and in India ₹50 lakh could be a reasonable threshold.
- It is important to focus on the “whales" rather than the “minnows".
Rationalization of taxes
- Reducing the number of tax rates .
- Getting rid of the 28?tegory altogether and transferring them to the 18% slab.
- The revenue including the cess is reported to be 22% of the total.
- At a lower rate, the turnover would be higher due to increased demand and the loss of revenue will be lower.
- For administrative reasons many of the items under 5% should be moved to 12%.
- Merger of taxation: the 12% and 18?tegories can also be merged at 15%. This will simplify the tax system into two rates.
- Widening of tax base: Petroleum products contribute about 42% of the revenue from domestic indirect taxes and in the interest of ensuring competitiveness, their inclusion in the tax base is essential. Besides, calibrating tax rates based on consumption pattern alone ignores the employment potential from these sectors. Only those that are difficult to tax for administrative reasons should be exempted and many of the items under 5% should be moved to 12%.
- Taxation of demerit goods: the proper method is to levy GST at the standard rate and have a separate excise on them instead of the current rate of 28 %
Enhancing research and technical capabilities
- It is important to have a strong technical secretariat comprising administrators, economists, accountants and lawyers to advise the GST Council based on rigorous research.
- The team should have the capability to estimate the effects of changes in the base and rates, administrative and legal implications of various measures,
- It should present the options to the GST Council to take informed decisions.
- It is not surprising that independent researchers find it impossible to get the data to undertake quality analysis
The introduction of GST which is currently seen as a reason for slowdown. Urgent reforms need to be placed to reduce the fiscal burden on the government and kickstart the slowing economy with enough jobs created to a march towards $ 5 tn economy.