From enforcement to trust

After process reforms, GST needs road map to shed exclusions

When India rolled out goods and services tax (GST) on July 1, 2017, there was a concern that the bureaucracy grappled with — the uncertainty about the revenue trajectory and the need to compensate the states for any revenue shortfall in the first five years of the new tax. One source of revenue was proceeds of the GST compensation cess levied on items such as automobiles and tobacco. The other way to address the revenue risk was to have enough checks to prevent evasion. The tax system, thus, remained geared to ensure compliance, but at the expense of procedural simplicity. But officials’ worry about revenue collection and unmanageable compensation requirement did turn out to be true when the first Covid-19 wave hit India, and GST revenues plummeted in April 2020. 

Monthly gross GST receipts of the central and state governments, which averaged ₹95,515 crore in 2018-19 and ₹96,605 crore in 2019-20, fell to ₹32,172 crore in April 2020. Consequently, the central government had to borrow ₹2.69 trillion from the market to compensate the states for their revenue shortfall. The full repayment of that in 2025-26 offered the GST Council an opportunity in September last year to review the tax slabs and rates, phase out the cess, and offer a consumption stimulus by lowering the indirect tax on a range of daily use as well as aspirational items, ranging from toothpaste and shampoo to consumer electronics and cars in the biggest overhaul of the system. Also, the number of slabs was brought down to broadly two, 5 and 18 per cent, from the earlier four—5, 12, 18 and 28 per cent with cess. That helped to boost consumption demand. Private final consumption expenditure expanded 7.1 per cent in the March quarter of 2025-26 as compared to 5.6 per cent at the same time a year earlier.

 The next logical step for reform obviously was cutting red tape and making life simpler for businesses. The tech-enabled tax system, which captures a large amount of data from multiple sources, has made it possible for the authorities to spot sources of revenue leakage. The GST Council’s decisions last week — to drop the arrest provision, lower the penalty from ₹25,000 to ₹10,000, recall notices issued for amounts below ₹10,000 and not to issue such notices in future, offer credits for taxes paid on input services from November and on capital goods from April next year, and simplify the norms for GST registration and refunds — are a major structural overhaul of the tax system. The prosecution threshold is also being raised from ₹1 crore to 

₹5 crore. These measures mark the transformation from a framework designed to deal with tax evasion by a few to one that facilitates honest tax payers based on trust. 

However, the task is not over. Two proposals, one meant to offer annual return filing and quarterly tax payments to consumer-facing businesses with sales up to ₹5 crore and a second proposal to further ease input tax credit availability, are sought to be implemented from April next year after another round of deliberation. The broader unfinished agenda for GST’s full benefits to accrue to the economy is the inclusion of items such as petrol, diesel, electricity and natural gas that remain outside its ambit. If the tax rates are indeed going to be reviewed only once a year from hereon, that should free up the Council’s bandwidth to discuss and lay out a road map for such excluded items so that efficiencies and competitiveness are enhanced across the value chain and GST truly becomes “good and simple”.