Seven years on

Reform of GST, rates included, is overdue

It has now been seven years since India’s indirect tax regime was completely overhauled, with the introduction of goods and services tax (GST). There was a great deal of compromise about the final form of GST, including between the Union government and doubtful states. These compromises, it was understood at the time, would limit the efficiency improvements provided by GST. Many hoped, including this newspaper, that over time structural impediments within GST would be removed and the full efficiency gains would be realised. Seven years and two general elections on, it is clear that more effort needs to be put into basic improvements to the system.

GST is overseen by the GST Council, which brings together finance ministries from the states and the Union. The Council met this past weekend, but once again deferred deeper questions about GST improvements to subsequent meetings. This is not to say that it did not do important work. Union Finance Minister Nirmala Sitharaman pointed out the decisions taken by the GST Council included changes to how demand notices could be challenged and to appeals, as well as other improvements to the compliance system. For example, non-fraudulent cases will no longer require interest or penalties, and the department will not appeal judgments against it to higher courts automatically, but be subject to revised monetary caps. Given that almost 2 per cent of assessments are being challenged, such changes are clearly of great importance. One of the promises of GST was ease of use, and that is not being lived up to as much as it should be.

The time has come to return to reforming the basic structure of GST. Why the dual structure of GST, at both state and central levels, is essential to indirect taxes must be questioned. The unfinished agenda of GST also includes rationalising rates and slabs. The indirect tax system was originally designed with a single rate, which would allow for clarity and efficiency. But instead, multiple rates were introduced, and the GST Council therefore could not resist the temptation of tweaking those rates in a populist manner. Even in the last meeting, the rate for packing boxes was brought down from 18 to 12 per cent. Such tweaks are an invitation to rent-seeking and a waste of the Council’s time. The Council did, however, promise to discuss including petrol and diesel within the GST system. These, like alcohol, are still taxed by the states, and are a major source of cost and inefficiency within the system. Bringing them under GST is overdue.

An even more divisive question is what will be done with GST compensation cess surplus, which could total as much as Rs 70,000 crore. The cess is levied on “sin goods”, including tobacco and expensive automobiles. Part of the reason for the cess was to use it to repay the loans taken on behalf of states during the pandemic. But it seems there will be a considerable amount left over. The discussion on what to do with it has been postponed. Debate over how this windfall is to be used is natural. But it should not be allowed to delay or disturb deeper questions of GST reform.