Better and simpler

Bold move on GST, but there is need to do more

Ever since it was put in place in July, the goods and services tax (GST) has been receiving a barrage of criticism for its many imperfections. The trouble was not so much with the basic idea of a GST, but with the way it was rushed through and implemented. But the promise of “one nation one tax” gave way to various conditions and complexities that made the final product much more confusing than originally envisioned. Apart from numerous tax slabs, which essentially opened the door to endless lobbying for lower tax slabs, the tax rates were way too high to incentivise compliance. What made matters worse was a whole host of administrative slippages and blunders such as the technical inadequacies of the GST Network to deal with the traffic as well as the onerous requirements to match invoices and file tax returns on a monthly basis. These were fertile conditions for popular discontent to boil over, especially in the background of the disruptions caused by demonetisation.

In that context, the decisions taken by the GST Council on Friday was a bold attempt to remove the creases in the new system. It could also potentially serve a political bonanza for the ruling Bharatiya Janata Party (BJP), which is locked in electoral combat with the Congress in Gujarat.

The biggest GST reset so far came after several rounds of tinkering with the fitment of tax rates. In all, 178 items were taken out of the top tax bracket of 28 per cent and many others became even cheaper. The Council also decided to increase the threshold of annual turnover (from Rs 1 crore to Rs 1.5 crore) to determine who among the small and medium businesses could enjoy the benefits of the composition scheme. Moreover, the tax rate under the composition scheme was halved to 1 per cent for manufacturers. The compliance burden was also eased significantly through extending the dates for filing returns and filing detailed input-output returns. This will ease many of the problems faced by small and medium industries.

Spectacular and wide-ranging as these changes may be, the fact of the matter is that the GST is still not close enough to what should be the ideal. In the tax structure, there are still many glaring inconsistencies, which need to be addressed soon. There are other issues to be addressed, too. In the original GST design, there was no place for tax exemptions. But to help exporters tide over a liquidity crisis, the GST Council at its meeting on October 6 decided to continue two pre-GST schemes that allow duty-free sourcing of materials for export production till March 2018.There is also a lack of clarity on the impact this latest round of reduction in tax rates is likely to have on the government’s revenue situation. A sharp decline in revenue will create problems in the medium term, even if it helps the policymakers politically in the short term. A heavy burden also lies on the states to make the idea of a uniform tax work. They will have to restrain their temptation to gain short-term benefits by fiddling with tax rates, ignoring the damage this may do to the idea of one single market. Finally, the latest round of changes inspires hope that India is on course to implementing a two-tier structure of 18 and 12 per cent.