Goods and Services Tax (GST)

Goods and Services Tax as an unfinished agenda

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Challenges to GST

Context

Seen purely from a revenue point of view and as a fiscal policy tool, India’s GST is still on a rocky road.

Background

  • The GST was launched by India on the midnight of July 1, 2017.
  • Benefits of GST: Hailed as a landmark reform in India’s tax history, it was expected to improve tax-GDP ratio, end tax cascading, enhance efficiency, competitiveness, growth, and ensure lower prices.
  • Fiscal federalism: It was also projected as a watershed in India’s fiscal federalism.
  • the States have forgone a substantial part of their own tax revenue.
  • States were in turn guaranteed a GST compensation assuring 14% growth in their GST revenue during the initial five years.
  • India’s GST architecture: India’s GST architecture is built on the firm foundations of a GST Council and the GST Network (GSTN).
  • GST Council as due federal process: The first is the key decision-making body, chaired by the Union Finance Minister with a Minister of State in charge of Finance and the Finance Ministers of States as members.
  • This is envisaged as a due federal process to protect the interests of the States.

Unresolved issues

[1] Revenue neutrality not achieved

  • India’s GST paradigm stands on two key pillars: revenue neutrality and GST compensation for the States.
  • The assured revenue neutrality remains a mirage and many States have experienced a declining tax-GDP ratio.
  • Decline in tax to GDP ratio of state: In the case of major 18 States, the ratio of own tax revenue to GDP has declined.
  • While the share of the Centre in total GST increased by 6%, that of States put together lagged behind with only a 4.5% increase.
  • Stark differences between the Revenue Neutral Rates (RNR) for the producing States and consumption State have been observed. States producing exempted food grains also lost out.
  • Since the rates were lower under GST vis-à-vis the VAT regime, revenue neutrality was not adhered ab initio.
  • The problems were compounded with massive evasion following the dismantling of check posts, and later on fake invoices, that grew by leaps and bounds.
  • Experience of other countries: The South African experience illustrates how zero-rating and large exemptions have defeated revenue goals.
  • Canadian experience shows that GST could be improved by limiting zero rating, tax-exemptions and harmonising tax rates.
  • The resilience of the economy at the time of rolling out of GST is critical for its wider reception as the Australian experience shows.

[2] Not conducive to co-operative federalism

  • While the States collectively forewent 51.8% of their total tax revenue, the Centre surrendered only 28.8%.
  • Yet, GST is shared equally between the Centre and States despite two expert committees recommended for a higher share for the States.
  • Given the revenue neutrality failure and the host of other issues, many of the States are left with no option except to depend on GST compensation.
  • This is not conducive to sustainable co-operative federalism.

[3] Need for revenue sharing formula for IGST

  • Although IGST is a key source of revenue for many of the States, the clearing house mechanism and the process therein remains unknown territory.
  •  It was pointed out that GST is discriminatory to manufacturing States, indicating the need for a revenue sharing formula that duly incentivises exporting States by sharing IGST revenue among three parties instead of two.

[4] Other issues

  • Swift functioning of Input tax credit: The Malaysian experience demonstrates the need for swift and transparent functioning of the input tax credit system through a flawless IT infrastructure.
  • We operate in an almost information vacuum especially with respect to IGST along with several glitches in the digital architecture.
  • GSTN is now in the doldrums.
  • Data monopoly: It neither makes effective use of the massive and invaluable data being generated nor shares them to enable others to make use of them.
  • Such practice in “data monopoly” was a fact of history in India’s statistical system and has to go sooner rather than later.
  • Australia, having several similarities with India, in terms of Centre and the subnational units, and destination-based, multi-stage tax with input credit provisions, has not been revenue-buoyant.
  • It is a matter for consideration whether widening exemptions and the replacing of income-tax by GST in the case of small and medium enterprises are advisable measures in the Indian context.

Consider the question “What are the challenges facing the GST in India? What India can learn from the experience of other countries’ experience.”

Conclusion

Despite many years of efforts in evolving an Indianised GST system and over 50 months of adjustments with over a thousand notifications, with accompanying uncertainties in the first year and the novel coronavirus pandemic and the lockdown still in the saddle, GST continues to be an unfinished agenda. But how far and how long?

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