The 15th Finance Commission, headed by N K Singh, has suggested that the 12 per cent and 18 per cent slabs under the Goods and Services Tax (GST) be merged into one standard rate, and GST be rationalised to a three-rate structure, complemented by the 5 per cent merit rate and 28-30 per cent de-merit rate.
This has been a long-standing demand from economists and the Opposition, and has found a way in the Commission’s recommendations.
On behalf of the 15th Finance Commission, the International Monetary Fund assessed and found out that the effective tax rate under GST stands at 11.8 per cent. This is close to Reserve Bank of India’s estimate of 11.6 per cent.
This rate is considerably lower than 14 per cent, the average revenue neutral rate (RNR) that was required for smooth transition from the value-added tax regime without any revenue loss.
GST’s true potential is to generate revenue at 7.1 per cent of GDP, while at present it generates revenue at 5.1 per cent of GDP. The revenue gap thus stands at a massive 2 per cent of GDP, noted the Commission report.
At the current levels, this roughly translates into Rs 4 trillion worth of revenue loss. To put the gravity of this figure in perspective, the Centre has budgeted that Central GST (CGST) will fetch it Rs 4.31 trillion this financial year.
Taxes subsumed under GST were 6.3 per cent of GDP in the pre-GST period (2016-17), way higher than what GST has. Collection efficiency is the ratio of GST collections to the product (c*r) of final consumption expenditure in the economy (c) and the standard rate (r), and is a summary measure of efficiency of GST.
“[sic] It stands below 50 per cent now. At the potential estimated above, it will be around 60 per cent, which is around advanced country benchmarks,” the report noted.
Importantly, it found inconsistencies in the data available from GST returns (from GSTN) and the national accounts (by the National Statistical Office). The value of outward supplies from GSTR-3B returns (monthly summary input-output) stood at Rs 652 trillion in FY19, as against total value of output in the economy, which was Rs 348 trillion.
“If taxable outward supplies as per the GSTR -3B are to hold good, then the effective GST rate turns out to be 6.1 per cent, which is much lower than the effective rate derived from GSTR-1 returns,” the Commission report said.
“There is no validation within the system to establish consistency between taxable value and tax paid as per GSTR 3B,” the report added.
The report underlined the negative externalities of slow economic growth on GST, especially with respect to the contentious issue of GST compensation.
"With inflation being contained under the inflation targeting regime and some sluggishness in the economy, the nominal GDP growth itself is lower than expected. Hence, the protected revenue at an annualised rate of 14 per cent places a substantial burden on the GST system," said the report.
The report also highlighted that about 70 per cent of gross GST revenue goes to states due to sharing and devolution. With many taxes subsumed under it, GST accounts for 35 per cent of the gross tax revenue of the Union and around 44 per cent of own tax revenue of States.
It suggested that the inverted duty structure needs a change, as it might be the reason behind the high share of tax liability being paid using input tax credit.