Sterling debut

It is time to focus on the next stage of GST

Finance Minister Arun Jaitley and his entire team deserve compliments for implementing a very significant and complicated tax reform smoothly and with such fine results. Mr Jaitley announced on Tuesday that revenue collected under the goods and services tax (GST) in the very first month of its roll-out has crossed the government’s target. The GST collection for July has already netted Rs 92,282 crore, well above the projection of Rs 91,000 crore. What makes this even more creditable is that the target has been overhauled even though one-third of the eligible taxpayers are yet to file their returns. So it is obvious that the final tally will be much more. In stark contrast to the gloomy predictions about the GST derailing the government’s revenue targets, the first month’s performance is a ringing endorsement of the GST by businesses and the public at large. Mr Jaitley stated that in addition to the 7.2 million taxpayers who migrated to the GST from the previous tax regime, the government had successfully added an additional 1.8 million new assessees. If one leaves out the 3.1 million who either registered in August or opted for the compensation scheme, there were 5.9 million who were due to file returns by August 25. A very healthy 64.5 per cent, or 3.8 million, have done so. 

However, now that the initial worries and doubts have been cast aside, it is time to look forward to improving the GST. To begin with, the more-than-expected revenue collection demonstrates that the GST rates are possibly too high. As and when taxpayer coverage improves from the first month’s 65 per cent, as it is bound to do in the coming months, there will be a significant unbudgeted surplus on the revenue side. This is almost certain to result in a boost to income tax revenue as well, because that tax net will almost certainly widen. In fact, it has already done so.

What should the government do with the coming bonanza? It has every right to retain the additional income tax revenue, as it will be collected on the existing tax rates, but it should not pocket the extra money collected through the GST. The government should focus on the next stage of the GST, getting rid of the impost that is supposed to make up possible state shortfalls, which it is now clear will not be there, and reduce the main rate from 18 per cent to 15 per cent. Also merge the 5 per cent and 12 per cent rates at 8 per cent, leaving just three rates of tax — 8 per cent, 15 per cent and 28 per cent. At a later stage, the government could consider widening the coverage of the GST to include items currently excluded, chiefly petroleum products, electricity and alcohol.

On the expenditure side, what needs to be ensured is that the tax bonanza is used well and not frittered away by the state governments, which will receive the bulk of the money — their own revenue as well as their share from the central kitty. State priority must be expenditure on health and education while the additional central expenditure should prioritise infrastructure and defence. If used wisely, even a not-so-perfect GST can be a game changer.