The fifth anniversary of our grand rollout of the Goods and Services Tax (GST) will be celebrated on July 1. The passage of the law in Parliament that ushered in the GST era was made historic with a special midnight session five years ago. The Prime Minister addressed the nation on live television the next day, which also coincided with Chartered Accountants’ Day. As one of the promises of GST is enhanced tax compliance, thanks to its built-in interlocking incentives that deter evasion, PM calls black sheep among CAs to stop looting the exchequer under the guise of clever tax avoidance warned. As the memory of demonetisation was still fresh, he told CA that due to data mining, more than 300,000 companies had come under scrutiny and a third were violating Indian laws. By implication, the era of GST would put an end to such tax evasion, and the penalties would be harsher.
The promise of GST was not just leakproof tax compliance and complete electronic filing with real-time reconciliation, but frictionless commerce across state borders, eliminating the practice of intra-company depot transfer (to avoid interstate and central sales taxes). Tax collections, thus paving the way for lower taxation rates, with a good cycle of fiscal benefits for all. This promise remains unfulfilled for reasons that are not entirely due to the Covid, Ukraine war or external factors. This is due to a faulty initial design of GST and implementation glitches, which require frequent changes.
First, almost half of India’s national income is outside the purview of this destination-based consumption tax; Petro products, energy and electricity are not under the purview of GST. This cost adds up, as input tax credit is not available on higher taxes paid on petrol, diesel and electricity. This is especially harsh on certain sections of our service area. Not excluding certain sub-sectors also means that the overall GST rates are very high, which in turn can lure tax evaders. Is the current circulation of surplus cash an indication of large-scale transactions outside the purview of GST? Secondly, there are still too many slabs and all too often they are tinkered with and rates tinkered with, leaving too much discretion with the GST Council or the taxpayer. Till date, more than 400 rate revisions have been done. Unsurprisingly, litigation has increased and is closing the courts. The advance ruling mechanism often used in tax matters is either not available or is not working properly for GST. Thankfully, an arbitration tribunal is on the cards to expedite dispute resolution. Third, the unpleasant reality of inadequate telecom infrastructure and bandwidth availability in the country has hindered the kind of automation demanded by the GST system. Uploading documents can take a very long time. Mismatch between supplier and recipient details is common. Unintentional errors cannot be distinguished from intentional misdeeds. The taxpayer is forgiving and the valid refund remains closed. Thus, instant and continuous synchronization of vendor and customer data is an unreachable holy grail. At least enough allowance has been made to deviate from that goal. Frequent improvement is both necessary and possible. But there are still many wrinkles that are yet to be removed. Fourth, there is a need for changes in the administration of e-way bills and interstate GST. It’s still cumbersome and complicated.
But turning back from these challenges, it is worth revisiting the grand promise of GST. The rollout of a unified nationwide consumption tax regime was a landmark development, reflecting cooperative federalism. But instead of deepening trust and cooperation, there has been more animosity between the Center and the states. The then finance minister had all states signed up for GST in 2017, surrendering their right to levy sales tax in exchange for a generous five-year guarantee of 14% year-on-year growth in their respective GST revenues. . , Not only did this turn out to be very liberal, as no state had achieved such a healthy benchmark in its recent past before 2017, but it also left no incentive for states to impose themselves on tax collections. An earlier design, to harmonize the value-added tax provided for partial reimbursement of the revenue shortfall, leaves some “skin in the game” for states. But many states are now at ease at any mention of risk or burden sharing. They are demanding that the GST compensation guarantee be extended by five years, which will be financially disastrous for the Centre. Some states are now in open rebellion against the idea of a unified GST. They yearn for the bad old days of tax autonomy with barriers to inter-state trade.
The governance design of GST is also being questioned, as the Supreme Court recently held that the decisions of the GST Council are not binding on the states. Voting rights within the council are not tied to the share of states’ weights or total taxes collected in GDP. Therefore, the big states feel deceived. The GST design still carries the guise of a “revenue neutral rate” and is a far cry from the 10% or 12% rate originally envisaged by the Kelkar Task Force. Meanwhile, the third tier of government – primarily, the municipal corporations – is short of funds. , even if they are facing increased cost obligations to provide basic civic services. They have the least tax autonomy of the three levels.
On its fifth birthday, India’s GST is still a lot of work in progress.
Ajit Ranade is a Pune-based economist