The Indian government is going to slash the number of rates of the Goods and Services Tax (GST) to three from five. This is a welcome move. It has been a longstanding suggestion by many experts and opposition parties
like the Indian National Congress that a large number of
GST rates is counterproductive. This is because the nature of GST involves a lesser number of rates compared to the earlier tax regime. It is also true that GST itself is calculated using a value-added method. A few days ago, Krishnamurthy Subramanian, Chief Economic Adviser, Government
of India, hinted that the government was in favour of
lowering the number of rates of GST to three from the prevailing five. He told this in an online conference conducted by ASSOCHAM.
Some recapitulation on GST
GST (considered as the biggest indirect tax reform to happen in India) was implemented in July 2017. Not less than 160 countries have already implemented tax reforms to the tune of GST or VAT. Seventeen indirect taxes have been subsumed by the GST in India. The customs duty, a major indirect tax of the central government was however left out of it. Taxes on petroleum products, alcohol products and electricity have also not been subsumed by GST.
Some of the important features of GST have been 1) seventeen taxes have been replaced by one tax to ease business 2) GST is calculated on ‘value addition’ and not the value of the goods and services 3) It will remove the cascading effect of each of the taxes which have been subsumed in GST. This reduces the tax rates and hence the prices of goods and services would fall 4) In GST regime black economy would reduce and tax collection would rise 5) It would ease the supply chain of production and hence increase economic efficiency 6) Transportation would be easier because of the elimination of tolls and implementation of e-way bills.
The status quo of GST
In last July 2021, GST revenue collection was `1,16, 393 crores after slipping below the `1 lakh crore mark for the first time in the last eight months in July. After the high collection of GST in the last July, Nirmala Sitharaman reportedly said, “With the easing out of Covid 19 restrictions, GST collection for July 2021 has again crossed `1 lakh crore, which clearly indicates that the economy is recovering at a fast pace.”
Actually, the July collection was 33% higher than a year ago. Collection increased due to rise in import of goods (36%), increased domestic transactions, import of services (32%) and some other sources. The GST collection was highest last April when it touched `1.41 lakh crore.
The states and not the Centre are hit
It is known that the GST system is unable to show tax buoyancy by a considerable amount as had been claimed while the GST was being prepared for implementation. The Economic and Political Weekly (EPW) July 17 2021 issue points out that even after four years of GST, the government has been unable to operationalise a robust IT infrastructure. According to the EPW article (First Editorial) “Early this year the Comptroller and Auditor General (CAG) of India noted that the system to validate input tax credit through invoice matching is still lacking. Similarly, the Fifteenth Finance Commission opined that the GST compliance system is still non-functional.”
Regarding rate cuts, the states are disproportionately losing revenue. After devolution, the states earn about 70% of their revenue from GST. After more than six time rate cuts the tax base of states has been eroded. The EPW (July 17) points out that the effective weighted average GST rate fell from 14.4% to around 11.6% now. This reduction in average GST tax rates has hurt the resource mobilisation of efforts of the state governments.
There are, perhaps, 17 states which are ruled by BJP alone or the party has a considerable support base in the state governments. These state governments have reservations to oppose policies taken by the Union government regarding GST. Although theoretically, the states have a bigger say in the GST council. Secondly, the Union government is bound to compensate for the revenue gap of states (considering 14% growth of revenue on a y-o-y basis) for five years only. That condition is going to terminate after one year. From that time onwards each state government has to take its responsibility of generating revenue on its own.
What should be the role of the Union government?
Experts think first, the Union government should take serious steps to strengthen the IT infrastructure base for GST. Secondly, it would help to increase the tax base of the states so that the states may have some flexibility in earning revenue according to their economic structure and needs.