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The Goods and Services Taxes (GST) has been in operation since July 1, 2017. The GST was projected as a revolutionary indirect tax reform in the country. The purposes of implementing the GST have been many. The main projected advantages were to ensure an increase in GDP, reducing inflation, guaranteeing higher tax collection to help increase spending in the social sector, lowering space of the black economy, increasing the efficiency of market and ensuring an increase in fiscal gain of the poorer states compared to that of the richer states. But there has been a fair share of criticism as well.

The Indian economy has been slowing down for the last three years. The GDP growth rates fell down from 8.2% in 2016-17 to 3.1% in the fourth quarter of FY 2019-20. One can keep aside the 23.9% degrowth of GDP in the Q1 of this FY. In every month, the GST collections were below the target of 1.1 lakh crore per month. Inflation rates remained not very high (due to other reasons than GST) but were positive. The fiscal positions of the poorer states were not impressive. The GST was implemented on the back of a slowing rural economy and the regressive impact of demonetisation. As a result, the unorganised sector had been already in great trouble with rising unemployment. Therefore, the effective demand of the economy as a whole slowed down and later the problem started to enter the organised sector as well. The problem of the organised sector increased after the implementation of the GST. But some observers believe that the positive impacts of GST could not be registered as the economy had already been in a downward trend.

Present status of GST

The most important consideration of the taxation method has been the amount of collection of revenue. From the very beginning, collection of revenue under GST has been below its targets. Earlier it was thought that the hasty implementation of the new tax regime was the reason behind this. By May 1, 2018, more than 400 notices and orders had been issued that created confusion. But even today, confusions and complexities remain.

At present, in the Covid-19 situation, the collection of GST has been very low. The finance ministry stopped releasing the collection figure of last April as it was miserably low due to the complete lockdown at that time. But it has somehow improved later. The June collection was `90,917 crore but it came down to just above 87,000 crore in July. It is expected that GST collection would improve gradually but it is very difficult to touch the targeted 1.1 lakh crore per month target even in the medium term.

Professor Ambar Ghosh of Jadavpur University and a co-author of the book, ‘Public Finance’ has expressed doubt about a big recovery of GST collections. He said when the economy is in high recession the GST collection is expected to be low. This is possible if inflation is very high.

The financial help to the state governments from the central government to tackle the financial crisis of the Covid 19 phase has not been satisfactory. States are demanding their due shares of GST from the central government. However, the central government has advised the states to take loans either from the RBI or from the market.

The state governments have been displeased with this attitude. The state governments ruled by opposition parties like Telangana, West Bengal, Punjab, Kerala are more vocal against the central government’s non-payments of GST shares. Some of the states have expressed their doubts about the future of the GST regime. Under GST, the states are guaranteed by the central government to be compensated for any revenue loss for the first five years from the compensation funds which has been made by levying cess from luxury, sin and demerit goods.

Immediate crisis

On August 18, 2020, Sushil Kumar Modi, the Deputy Chief Minister and the Finance Minister of Bihar and head of a high-level ministerial panel on GST, told in a webinar conducted by The Institute of Cost Accountants of India, said that the total collection of GST was expected to be only 65% of the last year’s figures for the current fiscal. In that case, there would be a gap of 2.67 lakh crore. Additionally, if the total cess collection stood at 65% of the last year’s total cess then the shortfall would be 2.05 lakh crore. In that case, states would also have to suffer financially. Modi pointed out an important matter. In the compensation formula, it has been assumed that the state’s growth of revenue would be 14%. Modi said, “I personally feel that the benchmark rate of 14% is very high as the growth rates of state GDP are 10 to 11%.”  He also pointed out that public limited companies, consisting of 0.62% of the total number of GST payers, pay 35% of the total GST and private limited companies, consisting of 5.87% pay 27.5% of the total GST, whereas only 0.02% of the total payers, the PSUs, pay 9% of the total GST. So only 6.15% payers pay 72% of GST. Therefore, he opined that the tax base should be increased.    

Modi mentioned that sectors like textiles, footwear, and mobile phone producers are subject to an inverted duty structure because in these sectors, the rate of input tax credit is greater than output tax liabilities. The inverted duty structure problem would need to be resolved soon. Secondly, the rationalisation of tax rates is required and gradually only two rates will prevail instead of the five rates that are in prevalence at present. Thirdly, e-invoice will be in operation from October 1, 2020. Fourthly, a complete check of presenting fake invoices where many fake companies do not participate in any trade at all but claim huge refunds by submitting fake invoices would have to be ensured. Fifthly, he also highlighted the need to implement an easier way to file returns.

Impact of GST on the Indian economy

Arun Kumar, Professor Emeritus, JNU, New Delhi and a foremost public finance theorist, thinks that the GST in its present form cannot have a positive impact. He has explained this in detail in his book ‘Ground Scorching Tax’ and in many of his articles in Economic and Political Weekly and in media interviews. In this form, GST would hurt the micro and small units which constitute more than 90% of the MSME sector. This form of GST would be structurally inflationary and discriminatory against poorer states. Therefore, this decreases the level of employment and demand for goods and services and the GDP as a whole. This in turn lowers the collection of tax. He has therefore suggested a new form of GST which would not be collected in the different stages of production but at the last stage - that is from the consumers. But Professor Ashim Dasgupta, former Finance Minister of West Bengal and the first chairman of the GST council, believes that the problem with GST lies in its implementation and not in its structure.