Tranformational tax reform

GST has achieved a lot in three years, but there is an unfinished agenda

The many criticisms about the implementation of the goods and services tax (GST) must not be allowed to obscure the fact that what was implemented was a truly transformational tax reform. First, let us look at the politico-economic dimension. While the world over, there has been demand for devolution of fiscal responsibility and even political separation — Scotland from the UK, Catalonia from Spain and Quebec from Canada, the GST reforms in India represents a reverse phenomenon where the Centre and the states have voluntarily abjured their “Right to fiscal sovereignty” and opted for pooled sovereignty and joint policymaking through the medium of the GST Council. On the tax policy side, there are fundamental changes.

One, the abolition of “Entry 52” in the Indian Constitution has unified the common Indian market. Truck turnaround times have dropped dramatically all over the country. Our studies for the Mi­nistry of Road Transport and Highways in collaboration with the World Bank show that the average trip time across five major goods transport corridors, including Delhi-Mumbai, Delhi-Ban­galore, Delhi-Chennai, Mu­mbai-Bangalore and Kolkata-Bangalore has reduced by 17.5 percent post GST.

Two, the abolition of the CST has fundamentally changed the rules in the logistic sector. Pre­viously, many big companies set up warehouses in all the major consuming states to avoid payment of CST by stock transferring goods. Today, the same companies can plan a warehousing model, which is oriented towards economic efficiency rather than tax savings. Today we find a trend among many transportation companies to morph into logistic companies seeking to provide an end-to-end solution.

Three, the services sector has immensely benefited from being able to avail credit on taxes paid on capital goods, which was hitherto confined to manufacturing units using them in the factory of production. This is reflected in the Marginal Effective Taxation Rate (METR) falling drastically for the services sector. Our study shows that the METR rate for services sector like transportation and finance dropped significantly by more than 50 per cent post GST.

Four, abolition of all CVD exemptions has created a level playing field for domestic manufacturing units. CVD exemptions made imports cheaper, while domestic companies paid VAT, Excise duty or Service tax on domestic procurement. The imported goods enjoyed input tax exemptions on being exported to India.

Five, the GST reform provided a common technology platform for units paying both CGST and SGST in respect of three key business processes namely, registration, return filing and payment of taxes. This technology platform has made tax payments transparent, besides providing valuable data for policy formulation. This offers the prospect of estimating gross domestic product (GDP) from the expenditure side.

Finally, the GST will address the problem of poorer states suffering from tax inadequacies. GST, being a destination based tax, will generate more revenues for the poorer large consuming states of Uttar Pradesh and Bihar. Some studies have already shown that the proportion of total revenues going to poorer state like Uttar Pradesh of the total tax kitty has improved compared to pre-GST period.

These transformational chan­ges notwithstanding, there is still an unfinished agenda, which when completed will make “what is a good GST” into “a great GST”. For this, we need to rationalise the number of rate slabs. This has already happened to some extent with a number of goods moving from 28 per cent GST slab to the 18 per cent slab. We could also consider merging the 18 per cent and 12 per cent slabs to a single rate slab. In this rate rationalisation exercise, we can also look at how we can encourage Make in India in crucial sectors like textile, footwear, consumer electronics, pharmaceutical and medical devices.

Further, a number of exemptions must be curtailed for not only do they erode the tax base, but also burden the industry with accumulated unusable tax credits.

The other much needed re­form is to bring the excluded items within the GST net. In the petroleum sector, we could first consider bringing aviation turbine fuel (ATF) and natural gas within the ambit of the GST. These are mainly intermediates and will fit into the GST plan of providing an end-to-end GST credit from raw material to retail.

Further, the GST base expansion plan can also be used to initiate factor market reform in two sectors (reform of the nineties was confined to the product markets) namely, land and electricity. This can be done by bringing real estate and electricity within the GST net. It is now clear that no constitutional amendment is required to bring real estate under the GST. “Right to use land” for construction can be treated as a “deemed service”. This will help to track land transactions and also establish its true value. This will curb the generation of black money. Bringing electricity into the GST would facilitate availment of tax credits on capital equipment, which will benefit the whole spectrum of industry in the energy space from thermal to renewables. This measure would also help to evaluate the true incidence of taxation and facilitate policymaking — the draft Electricity Bill is already placed before Parliament.

Finally, to help the micro, small and medium enterprises (MSME) sector, the entire segment, including the compounding units may be brought into the taxation ambit by giving an option to pay taxes on a reverse charge mechanism (RCM). Large firms could be in­centivised by Securities and Ex­change Board of India to trade with the MSME units on the Trade Receivables Discounting System (TReDS) platform so as to facilitate the issue of invoices and also expedite early payment of dues to the MSMEs. This will help to remedy the reluctance of large firms to purchase from the small on account of non-availability of tax credits on the purchases.

To sum up, just as the mythological churning of the oceans by the devas saw poison preceding the emergence of nectar, so too the toxins coming from technological glitches and procedural complexities will yield to the nectar of reform benefits.

The author is a retired member, CBIC, and currently national leader, Tax and Economic Policy Group, EY India

Views expressed are personal