Work in progress

GST must be reformed to achieve its potential

The goods and services tax, as introduced four years ago, was necessarily imperfect. This was a product of the political negotiation required for a major indirect tax reform to pass the constitutional hurdles in its path. Yet even so, it was welcomed by many because it had the potential of clarifying the tax law, simplifying tax payments, reducing leakage, increasing compliance, and raising revenues. That potential, however, required it being continually improved as and when problems were revealed in its implementation. While the GST Council has indeed met regularly and tweaked the GST, not all of that has been for the better from a long-term perspective. In fact, far too many of them have been simple reductions in rates that had the result of reducing revenue and increasing complexity. 

The fundamental errors made at the beginning — including retaining the state governments’ indirect tax apparatus for political reasons— meant that the GST was not really national but required separate state and Union Territory registrations. Several important commodities, particularly alcohol, electricity and real estate, were also kept out of the GST net because state governments like to have the power to shift these rates around. While understandable as an initial political compromise, these exceptions cannot be considered to be permanent — particularly as fuel taxes have in the post-GST era grown to become a very large part of the Union and state government collections. The 400-strong list of GST exemptions has to be pruned. 
 

Rates will also have to be simplified and raised if the original desire to increase compliance and revenue is to bear fruit. There is considerable cross-country evidence that simple, single-rate GSTs have been far more efficient and productive. In addition, proper modelling of what a revenue-neutral single rate would be, once petroleum is included in the GST net, should inform the GST council’s choices. The other way of raising the total revenue from GST is by making it simpler for taxpayers. In particular, claiming input tax credit is not as simple as it could be. The current complex system should ideally be replaced by a straightforward negative list, with tax being claimable against all other inputs. This would increase compliance and reduce the burden on the tax authorities to check evasion as well as on taxpayers. Given the level of digitalisation of high-value transactions in the economy, including through e-invoicing, ways should be discovered to reduce the duplication in the recording of such transactions in the system. Finally, the dual state/Union architecture of the GST should have a sunset period, after which it is replaced by a single portal with a single login for all enterprises registered under the GST Network. 

Some of these reforms will require even more efforts by the state governments. The Union government will also have to be more generous to its federal partners—like in matters such as sharing of revenue from fuel and compensating the states for revenue shortfall —if the GST is to be reformed and achieve its real potential.