It may be recollected that when the GST was introduced, it was widely argued that it would lead to a decline in prices, increase collections and enhance GDP growth. Those more audacious came up with numbers of 1.5-3% increase in GDP. It was largely a theoretical exercise as the subject is complex and effect quite nebulous as these rates had to work their way through. With around two years of the new tax regime being in force, the question asked is whether or not it has worked. The issue being raised today is whether rates should be increased as there is a fear that revenue collections have been affected due to lower rates.
When the GST was introduced it was mentioned that the government was open to changes both in terms of rates and structures. Therefore, there has been fine tuning of rates in the downward direction over the last two years depending on the feedback received from industry. Systems have been made easier for SMEs so that payments became easier, as did refunds. Therefore the focus has been more on ensuring that the GST system was streamlined with the practical side. This was a pragmatic approach taken by the government as prima facie it was not possible to conjecture the way things would actually go.
The present slabs are 0, 5, 12, 18 and 28%. As a measure to move closer to a system with fewer slabs, this may be reduced to two or three to begin with. The 5% and 12% slabs can be integrated into either 10 or 12%. In case of the higher range the 18 and 28% could move to 28%. This seems to be a possibility now given that it looks like that the present momentum in the economy and the rationalised structure will not yield the kind of revenue required for maintaining the revenue targets.
The other contentious issue is in compensation for the states as it was to be in force for five years. Presently the delays have impacted the functioning of states with discretionary expenditure bearing the brunt as states have tended to defer or cut back on such expenditures with revenue flows not being buoyant. Therefore, clarity on these flows is required for sure.
The major problem for the government has been the tax collections on this score. The rule of thumb was that Rs 1 lakh crore per month had to be the collections from GST including all the three components. The states were also to be compensated for any loss of revenue which was reckoned at 14% per annum based on 2015-16 numbers. Intuitively it can be seen that for this model to work the taxable base had to increase which is that GDP growth has to be of a high magnitude in nominal terms. But the problem today has been that consumption growth (GST is a consumption based tax as against excise being on production) has slowed down leading to lower collections. This is the major challenge when tax rates are fixed with commitments to the states in the form of compensation. A double whammy is served to the centre when intrinsic growth is of a lower order. The fact that GDP growth in real terms for this year has been scaled down from above 7% to now just about 5% means that revenue collections are bound to get affected.
States are in a better position, which means that their compensation is a given quantum and the onus falls on the centre which will have a challenge to meet its fiscal targets. The expectation is that the GST council may selectively increase the rates. There are two problems here. The first is that when the rates were lowered, the benefit had to be passed to the consumer which has not always happened resulting in several companies being hauled up for profiteering. Second, if rates are increased and is passed on to the consumer, which will definitely be the case, it can actually lead to even lower growth in consumption which can come in the way of future GDP growth.
An accompanying problem is inflation. Presently, inflation is more due to supply issues on the food side and hence the so called core inflation is low. In fact manufactured goods inflation is negative going by the WPI which has helped to keep headline number low. An increase in GST rates will lead to higher growth in prices that can be a worry if the CPI number is higher wrung around 5%. This is a factor that the GST Council has to keep in mind.
The GST in India has not quite had the desired effect with the tendency being fairly volatile revenue and states not getting their compensation on time. As economic conditions have been downbeat overall consumption is also quite stagnant. Change of rates is required but has to be done in a measured way or else there would be more volatility in the markets. This was always going to be a challenge for us given the plethora of rates across the country. Integrating production and consumption taxes under an umbrella was always going to require a lot of dexterity as the interlinkages vary across commodity groups. We may still have a long way to go for the exact impact to be assessed more meaningfully.
The writer is chief economist, CARE Ratings.
Views are personal.