Goods and Services Tax (GST)

Fundamental problems facing GST regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Fundamental challenges GST regime faces

The article highlights the fundamental challenges the GST faces in the form of trust erosion and politicisation of decision making in GST Council.

Initial issues with GST

  • The multiple rates structure, high tax slabs and the complexity of tax filings as the problems underpinning India’s GST.
  • These were indeed the initial problems in the way GST was implemented, leading to some of its current woes.
  • However, technical fixes such as simplification of GST rates and tax filing systems will not succeed in addressing the fundamental problems with GST.

Fundamental problems

1) Politics influence the decision of GST Council

  • The 43rd meeting of the Goods and Services Tax (GST) Council which consists of 31 States and Union Territorie is to be held on May 28.
  • Ideally, political affiliations should not matter in a Council set up to decide indirect taxes.
  • The GST Council was mandated to meet at least once every quarter, but it had not met for two quarters, due to the pandemic.
  • Several of the 14 members of the groups who belong to parties different from the party ruling in the Centre, requested the Finance Minister to convene the GST meeting to help them manage their finances.
  • None of the 17 members of the ruling group deemed it necessary.
  • Even the need for a meeting to determine tax revenues for States is evidently a political decision.

2) Lack of trust

  • The GST Council is a compact of trust between the States and the Centre, set in the larger context of India’s polity.
  • The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of politics.
  • If the functioning of the GST Council is subject to the vagaries of elections and consequent vendetta politics, GST will continue to be just a caricature of its initial promise.

3) Uncertainty after the guarantee of 14% growth ends

  • The States paid a huge price for GST in terms of loss of fiscal autonomy.
  • GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year.
  • This minimised the risks of this new experiment for the States and compensated for their loss of fiscal sovereignty.
  • This revenue guarantee ends in July 2022.
  • This can lead to a crumbling of the precarious edifice on which GST stands today.

Consider the question “What are the challenges faced by the States in the GST regime? What would be the impact on States as a guarantee of 14% growth in tax revenue comes to an end in July 2022?” 

Conclusion

The end of India’s grand GST experiment seems inevitable unless there is a radical shift in the tone and tenor of India’s federal politics, backed by an extension of revenue guarantee for the States for another five years.

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