It has been three years since the introduction of Goods and Services Tax (GST), independent India’s biggest tax reform. Rolled out with a grand fanfare on the midnight of July 1, 2017, at a glittering ceremony in a special session of Parliament, the unified GST law was aimed at subsuming multiple central and state taxes, including the excise duty and sales tax, paving the way for creation of a single national market with uniform GST rates across all goods and services. It has been a roller-coaster ride for the government, industries and consumers due to the changes and reforms introduced in the past three years. These changes were primarily focused on rationalising rates, simplifying procedures and curbing tax evasion. So how successful has this historical tax reform been in achieving its desired objectives?
The introduction of ‘one nation-one tax’ law by replacing the myriad indirect taxes by a simple, transparent and technology-driven tax regime has been GST’s big achievement. But three years later, GST is still a work in progress and is yet to become a good and simple tax. From its original shape and form, the GST law has undergone significant changes. With almost 700 notifications, 145 circulars, over 30 orders and 11 corrigenda, significant changes have been made to address taxpayers’ grievances and demands, to carry out procedural simplifications, remove deficiencies and curb tax evasion. For much of the past three years, GST has been widely criticised for its hasty and flawed implementation as also for having failed to deliver benefits that were expected of it. Integration of the Indian marketplace, creation of scale efficiencies and enhanced gross domestic product (GDP) growth were the expected outcomes. But GST is yet to deliver to its full potential on these intents.
Since its implementation, GST has seen a significant increase in tax base and a change in taxpayers’ compliance behavior, but multiple rates, high taxes for various products and technology have been the biggest letdowns for its smooth implementation. Woes and ills of smaller businesses, traders and medium enterprises attributed to the GST have had an impact on GST collections. The shortfall in relative to expectation in revenue has had an impact on GDP growth. Three years ago, GST was touted as a game-changer with the potential to add about 2 percentage points to India’s GDP growth rate. That has not happened. On the contrary, GDP has slowed in the past few years. Experts have found faults with the GST model on many fronts, one of them has been the shortfall in revenue collection and the other being the fundamental structure of GST. One of the criticism is that GST is essentially a flat tax (single rate) and not having designed it as a flat tax has been a big mistake.
It is true that many countries have multiple rates but India has five-fold tax structure which, many analysts believe, could have been culled into two rates for merit and demerit goods. India also has the highest tax rate out of all the countries that have implemented GST. This has been the sore point for most businesses in the country, which, it is believed, impacts revenue as higher tax reduces compliance efficiency. Though structural complexities with regard to technology and multiple tax rates have added to the pain points, the subdued tax collection has been a constant area of concern for the government. Now the pandemic right in the middle of an already slowing economy has added more challenges for the government which is hard pressed for revenue.
Conceptualised and proposed in 2000, it took 17 years for GST to come into existence. After missing several deadlines, the BJP-led NDA government was able to push its way through with GST law because the ruling party was in power in many states; the opposition-ruled states fell in line because states were guaranteed an annual revenue growth of 14 percent, over what they had earned in fiscal year 2015-16. Any shortfall was to be compensated by the Centre for the first five years – that is till 2022 – from the additional tax imposed on luxury goods and sin products. However, not a single state has managed to hit the 14 percent revenue growth target so far. In 2019-20, some of the big states like Madhya Pradesh, West Bengal, Maharashtra and Karnataka managed to improve their GST collection by 9 to 10 percent, but most other states registered only 6 to 8 percent rise in revenue.
By law the central government is committed to pay compensation to states every two months. But because of the economic slowdown and lockdown which have not only affected revenue collection but also GST compensation cess, the Centre is unable to release state dues on time. Compensation for February-March, which should have been release in April was paid in June and for the lockdown period of April and May is yet to be released. This is one reason why state governments have been clamouring for GST compensation from the Centre and the delay on the part of the central government has forced state government to raise their revenue from alcohol and fuel. That is why alcohol shops were the first to be opened after the lockdown was relaxed and several states sharply raised taxes on alcohol besides raising VAT on petrol and diesel.
The GST regime aimed for simplicity by breaking down myriad taxes but GST has turned out to be anything but simple. Government auditor CAG in its 2018-19 report observed that “one significant area where the full potential of GST has not been achieved is the rollout of the simplified tax compliance regime.” Despite all the promises of a single tax system, there are four types of GST: Central GST, State GST, Integrated GST and Union Territory GST. Further there are four rate slabs – 5 percent, 12 percent, 18 percent and 28 percent – under which goods and services are taxed. Though GST has replaced at least a dozen taxes, revenue continue to be subdued, which has made it even harder for the government to reduce tax slabs and tax rates to de-clutter the flawed system and boost demand and production.
Three years after India’s biggest and landmark tax reform hit the ground, there are still lot of challenges before the GST council. From discontentment of small traders and businesses to more systemic issues – slow growth of GST collections, the failure to reach consensus on rationalisation of rates and the inclusion of items such as petroleum products, electricity and alcohol in the GST ambit – GST has a significant ground to cover before it can live up to its promise and potential.
The writer is an independent Mumbai-based senior journalist.