Four years of GST

Some distance covered but there is scope for a huge improvement

Four years after its mega launch, goods and services tax (GST) has covered a long distance. Before GST came into effect on July 1, 2017, multiple markets across India, with each state charging a different rate of tax, led to huge inefficiencies and costs of compliance. The government is right in pointing out that GST has eased one of the most complex indirect tax systems, and a company looking to do business in every state had to make as many as 495 different submissions in the previous tax regime. Under GST, that number has now reduced to just 12. One of the reasons for the earlier subdued GST collection was the persistent problems in the backend infrastructure. This issue has been addressed to a large extent and mandatory e-invoicing above a threshold is helping improve compliance. However, as the GST system moves into the fifth year, there is no doubt that it has fallen short of initial expectations, and concerted efforts need to be made to improve one of the most significant reforms in recent decades to make it a more stable and efficient tax system. The reform, which many believe was implemented haphazardly, is said to have significantly affected the unorganised sector. The idea was to keep improving the system over time.

The most important aspect the GST Council needs to focus on is tax collection. Revenue generation is estimated to have fallen by over 1 per cent of gross domestic product after the implementation of GST, compared to collection from taxes subsumed in it. This is an untenable position. GST was expected to improve efficiency, reduce evasion, and boost tax collection. One big reason for lower tax collection is premature reduction in rates below the revenue-neutral level. The weighted average GST rate came down from 14.4 per cent at the time of implementation to 11.6 per cent in 2019, according to the Reserve Bank of India. This needs to be reversed. India is in an extremely difficult fiscal position and cannot afford to have an underperforming indirect tax system. Thus, the Council should immediately rationalise rates. Simultaneously, it should address the issue of the inverted duty structure and lower the number of slabs. This would also make compliance easier and boost revenue. As GST completes five years in 2022, states will lose the guaranteed compensation for revenue loss. A separate meeting of the Council is expected to take a decision in this context.

It will be advisable to not extend the compensation period. In fact, compensating the states for 14 per cent revenue growth was an impractical idea from the beginning. Further, the government is borrowing from the market to compensate states for the second consecutive year, which would be repaid by extending the cess beyond June 2022. If the compensation structure is extended, it will further delay the simplification of GST, affect revenues, and increase uncertainty. Also, guaranteed compensation reduces the incentive for states to plug leakages and push compliance. If the system does not stabilise after five years, it would suggest that the required effort has not been forthcoming. The onus is clearly on the ruling National Democratic Alliance, which implemented the reform, and has governments in several state capitals. Besides, the Central government should work to take cooperative federalism forward and address the concerns of the states more cordially. This has taken a few knocks in recent times.