The Goods and Services Tax (GST) has completed its 5th year today since its inception on 1st July 2017. The move towards ‘One Nation One Tax’ was one of the most historic indirect tax reforms India has ever undertaken. After more than a decade of concerted efforts to build consensus, GST replaced 17 central and state taxes and 13 cesses, eliminating the cascading effects of indirect taxation and laying the foundation for a common national market.
Earlier, our indirect tax regime was based on origination and was inefficient, as it resulted in high costs to the economy. Every state was, in fact, a separate market for businesses as well as consumers. Many industries were uncompetitive under the old tax regime, and this replaced options for factory or warehouse location, which must be determined purely by business considerations. According to an estimate by Federation of Indian Chambers of Commerce and Industry (FICCI), the total tax burden on goods before GST was between 25% to 30%.
Some consider the new GST regime complicated with its high and multiple tax rates. This was widely debated, and the GST Council considered two essential factors before arriving at a 5-tier rate structure. The first was the principle of equality, where all items fit into the rate slot closest to the existing total duty rates of all indirect taxes. Second, to protect the poor from inflationary pressures, items with a weightage of 60% in the Consumer Price Index (CPI) were exempted from GST, while the other 15% were subject to only a 5% levy.
The proportion of taxable value of goods and services covered under the lowest bracket of ‘zero’ tax rate has increased from 9% in 2017-18 to around 17% in 2019-20, and is in the highest GST bracket of 28 . The % is projected to reduce from 12% to 7.6% in 2019-20. As a result, the effective GST rate was reduced to 11.6% in 2019 from 14.4% at the time of inception. However, despite this and the disruption of the pandemic, the GST-to-GDP ratio increased from 5.8% in 2020-21 to 6.4% in 2021. -22, indicating better compliance. With better compliance, a grievance-redressal mechanism (a GST tribunal) would be both timely and fair.
In order to protect the interests of the Micro, Small and Medium Enterprises (SME) sector, the government has taken several initiatives such as increased threshold exemption from GST registration, return filing and audit, quarterly filing of GST returns for taxpayers. annual turnover of 5 crore, exemption from GST payment at the time of receipt of advance on account of supply of goods, and a combination levy scheme, among others. For small taxpayers, the number of returns filed in a year has come down from 24 to just eight now. In fact, GST has opened new avenues for MSMEs through GST-based bill discounting and collateral-free access to loans.
The federal nature of the GST regime was on display during the pandemic. In 2020-21, the revenue from State GST (or SGST) declined due to economic contraction. However, considering the compensation paid to the states and the arrangement of back-to-back loans, the total GST revenue for the states was 7.69 trillion (including back-to-back loans and compensation cess) in 2020-21, vs. 6.86 trillion in 2019-20. This was a growth rate of 12.1% in a Covid affected year. With increasing revenue from SGST 8.68 trillion in 2021-22, an increase of 12.9%. These back-to-back loans will be liquidated through the extension of the compensation cess beyond the early sunset of June 2022.
In the pre-GST era, Indian states would have no recourse to a compensation cess, nor could they consider boosting their revenues through new and/or higher levies during the pandemic. Overall, in the five years (2017-18 to 2021-22) since the introduction of GST, the overall resource growth for the states was 14.8% per annum, compared to an annual average growth rate of 9% between 2012 and 2015. Clearly, the state is better before the implementation of GST. A youth tax regime, therefore, was put to the test in a period of high economic and humanitarian stress, and proved its usefulness to India’s public finances.
All indirect taxes are regressive in nature. Their regressive nature is mitigated by merely adding value to taxation. But the large number of exemptions means that there is no input tax credit to be claimed by many taxpayers; It also means a smaller tax base, which forces certain items to bear the burden of making up for a larger number of exemptions. Similarly, rates without input tax credit also add to the regressive nature of the tax. Therefore, from the angle of economic efficiency, the current rate structure is a work-in-progress. The recently concluded GST Council meeting has gone on to address some of these issues, and that is good news.
Lastly, one area in which the GST regime can play a role has nothing to do with taxation. It is about the rich data that it has, which can provide very useful and penetrating insights into the health of the economy and also trends in economic activity from a cyclical perspective. This can help us track the formalization of the economy and the transformation of the MSME sector. It can help us understand the districts and regions where economic activity is flourishing or lagging, and decide what to do about it, if anything.
Therefore, on its fifth anniversary, GST Network can contribute more than ever to public policy making, while respecting the considerations of privacy and security, by opening up its data. Thus, the GST will continue to contribute to the strengthening of public finances, but will also lead to sound policy formulation by the Central and State Governments in the true spirit of federalism.
V. Ananth Nageswaran is the Chief Economic Adviser to the Government of India