Tough tasks ahead

GST Council must focus on rationalising the tax system

The Goods and Services Tax (GST) Council will meet next Thursday under a new chairperson, Finance Minister Nirmala Sitharaman. This will be the 35th meeting of the Council and the first after the formation of the new government at the Centre. The meeting is significant because it will be held just about 10 days before the completion of two years of the GST regime, which started on July 1, 2017. During this period, the new indirect tax regime has settled down as a relatively stable tax system, even though its many design defects and procedural glitches continue to be problematic and the overall revenue collections are still short of expectations. What are the key tasks ahead of the GST Council and its new chairperson?

First and foremost, the healthy tradition of a consultative process, followed in all the previous meetings of the GST Council, must be continued. In the past 33 months, since the Council’s first meeting in September 2016, decisions at this body have been taken invariably by consensus, without the need for seeking recourse to a voting mechanism, which the law permits. The use of the consensus approach has enhanced the federal character of the Council and dispelled the apprehensions of many smaller and Opposition-ruled states that the GST Council would ride roughshod over them and ignore their concerns. The path of consensus has not been without obstacles and overcoming them through consultation has often been a time-consuming process. But it has also laid the strong foundation of a federal institution that is responsible for levying taxes on goods and services. It is important that the GST Council under a new chairperson should continue to build on that relationship of trust.

Having done that, it will be equally important for the Council to focus on meeting the important challenges ahead. As reported in this newspaper, a proposal to introduce an electronic invoicing system will be considered at the next meeting of the Council. This will be an improvement over the current system and this will also plug revenue leakages. Due care must be taken to ensure that the new system is implemented without glitches. Equally important will be to put in place a simpler system for zero-rating of exports. At present, the procedures for refunding taxes paid by exporters are cumbersome and fraught with delays, undermining the competitiveness of India’s exporters.

Rationalisation of rates for different commodities and services should be no less important a goal for the Council. A way out of the current multiplicity of rates would be to agree on three broad bands, instead of the five rates at present, along with distortions by excluding input tax credits for a few products and services. A long-term goal should be to include petrol, diesel and aviation turbine fuel under the GST regime. Given the current dependence of the central and state exchequers on revenues from the oil sector, it may be necessary to rely on the imposition of a special duty on these petroleum products over and above the GST rates. This will help the governments maintain their revenue flow and at the same time should allow industry to enjoy the set-off benefits on taxes paid on such petroleum products. For the GST Council, the path ahead is not easy, but the challenges of initiating more reforms and rationalisation of rates must be met without delay.