Goods and Service Tax as unfinished agenda

The GST, or Goods and Services Tax, an institutional tax innovation marketed intensively in several countries by the International Monetary Fund and the World Bank, was wrapped up in a “one nation one tax” package, and accepted by India on the midnight of 1 July. it was done. , 2017. Despite the perceived haste in launching it by the central government, adaptations were made to suit the Indian context.

Hailed as a landmark reform in India’s tax history, it was expected to improve the tax-GDP ratio, eliminate tax cascading, increase efficiency, ensure competitiveness, growth and lower prices. It was also projected as a watershed in India’s fiscal federalism. While the states forfeited a substantial part of their own tax revenue, they were instead guaranteed a GST compensation, assuring a 14% increase in their GST revenue during the initial five years. In order to protect the interests of various stakeholders, multiple exemptions have been accommodated in many countries with different tax rates as against the single rate.

Unsolved Problem

Even after 50 months of existence, many relevant issues for both policy and action remain unresolved. An international symposium on GST, organized recently by the Gulati Institute of Finance and Taxation, brought together experts from India and select countries (Malaysia, New Zealand, Australia, South Africa, Brazil, Mexico and Canada). sui generis Policy debate focused on India’s GST experience. We, as participating observers, cherry-pick some of the observations made for reflection by policy makers and the wider public.

base and pillar

The GST structure of India is built on the strong foundation of a GST Council and the GST Network (GSTN). The first is the major decision-making body, headed by the Union Finance Minister, with the Minister of State for Finance and the Finance Ministers of the States as members. It is envisaged as a proper federal procedure to protect the interests of the states. GSTN generates high frequency data and subject them to analysis for informed policy making. Built on this foundation, India’s GST paradigm stands on two key pillars: revenue neutrality and GST compensation for states. Built on the principle of destination-based consumption taxation, with seamless provision for input tax credit with CGST levied by the Centre, SGST levied by states, UTGST by union territories, and IGST levied on inter-state supplies including imports, GST is applicable. A similar threshold exemption is applicable on both CGST and SGST for all goods and services except liquor for human consumption and five specified petroleum products.

Assured revenue neutrality remains a mirage and many states have experienced a decline in the tax-GDP ratio. Studies show that in the case of the major 18 states, the ratio of own tax revenue to GDP has declined. While the Centre’s share in the total GST increased by 6%, the share of the states lagged behind with an increase of only 4.5%. A significant difference has been observed between the Revenue Neutral Rates (RNR) for producing states and consuming states. States producing exempted food grains also suffered.

Since the rates under GST were low face to face VAT regime, revenue neutrality not followed AB initio, The problems were further compounded with large-scale thefts after the breaching of check posts and later counterfeit challans, which grew by leaps and bounds. Exemptions and subventions compounded and worsened the situation. The South African experience shows how zero ratings and big discounts have defeated revenue targets. In Mexico, although the country relied more on income tax with a standard rate of 16%, they could raise more than 4% of GDP from the GST.

Reviewing Canada’s 30 years of experience with GST, it has been shown that zero rating, tax-exemption and reconciliation of tax rates can improve GST. Brazil’s experience shows that transfers through social security or subsidies are more progressive than subventions or rebates because low rates or zero ratings usually do not reach target groups or industries as is the case in India. As the Australian experience shows, the flexibility of the economy when it comes to implementing the GST is critical to its widespread reception. However, India was in reverse gear given the slowdown after demonetisation.

GST in India was possible only because the states had surrendered most of their constitutionally inherited indirect taxes. While the states collectively contributed 51.8% of their total tax revenue, the Center surrendered only 28.8%. Nevertheless, the GST is shared equally between the Center and the states, while two expert committees have recommended a higher share for the states. Given the failure of revenue neutrality and a host of other issues, many states are left with no option but to rely on GST compensation. While compensation has to co-exist legitimately with GST, even a constitutionally guaranteed compensation for five years has not been implemented literally, leaving states begging for their rights. was forced to. This is not conducive to sustainable cooperative federalism.

IGST crisis, other points

Although IGST is a major source of revenue for many states, the clearing house mechanism and process therein remains unknown area, It was pointed out that GST is discriminatory to manufacturing states, indicating the need for a revenue sharing formula that duly incentivizes states to share IGST revenue between three parties instead of two. The Malaysian experience reflects the need for fast and transparent functioning of the Input Tax Credit System through a flawless IT infrastructure. Malaysia dropped the GST because of these woes. We work in an almost information vacuum with many pitfalls in digital architecture as well, especially with respect to IGST. GSTN is now in cold storage. It neither makes effective use of the vast and invaluable data being generated nor shares them to enable others to use them. Such practice in “data monopoly” was a fact of history in India’s statistical system and will have to go away sooner rather than later.

Australia, with India in the case of central and subnational units, and destination-based, multi-stage tax with input credit provisions, has not been revenue-buoyant. Australia’s GST revenue relative to GDP has fallen from 3.85% in 2003-04 to 3.28% in 2018-19. It is a matter of consideration whether such incentives to increase exemption in case of small and medium enterprises and replace income tax by GST are appropriate measures in the Indian context.

GST should be viewed from a purely revenue perspective and as a fiscal policy tool for efficiency, competitiveness and growth. Even by this standard, India’s GST is still on a rocky path, with many assumptions being dashed while hopes have been dashed. Neither the states nor the consumers have benefited as the rate cuts due to profiteering and wide-spreading have not translated into prices. Despite years of efforts to develop an Indianized GST system and adjustments of over 50 months with over a thousand notifications, with uncertainties in the first year and the novel coronavirus pandemic and lockdown still in the saddle, GST remains an incomplete one. The agenda is set. , But how far and for how long?

MA Oommen is Distinguished Fellow, and KJ Joseph is Director, Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram