From UPSC perspective, the following things are important :
Prelims level : Not much.
Mains level : Paper 3- GST-below expected collection, and problems associated with it.
In theory, the shift to GST made eminent sense, yet in practice, some of these expectations have been belied.
Why have GST collections not measured up to expectations?
- This could be due to a combination of three factors:
- First: The tax rates under GST are lower than in the earlier regime-GST was not revenue neutral, to begin with.
- Second: There has been massive tax evasion due to under-reporting, input credit scams and fake invoices
- Third: A slowing economy has impacted firm revenues, and thus tax collections.
GST should have been revenue-neutral but it is not
- Fitment exercises not carried out: The fitment exercise should have been undertaken in a manner so as to ensure that collections pre and post GST are the same.
- But, this fundamental principle was not adhered to, and other considerations dominated.
- Revenue neutrality Vs. Multiple objectives: The GST council began its deliberations not with the single objective of revenue neutrality, but with multiple objectives in mind.
- Closeness to existing tax: Council wanted to ensure that rates were close to the existing tax incidence (accounting for cascading); to ensure minimal impact on inflation.
- Not regressive: The council also wanted the proposed rate structure was not regressive in nature.
- The council wanted that items of mass consumption were not taxed at a higher rate.
- Achieving all these objectives simultaneously proved a difficult task.
The issue of tax evasion
- It is difficult to arrive at firm estimates of the scale of the problem but there are some indications of its size.
- In West Bengal, it was estimated that the value of goods (July 2017 to March 2018) entering a state appeared to be under-reported by around Rs 50,000 crore.
- Rs 60,000 crore in Madhya Pradesh, and Rs 1,50,000 crore in Maharashtra.
- Numerous cases of tax fraud and fake invoice scams have also been detected since then
Problems involve and possible solutions
- Invoice matching: It is argued that invoice matching will help if implemented it from the beginning.
- It could have helped plug the loopholes.
- Issue of under-reporting: It is debatable whether invoice matching can end under-reporting (collusion) and fake invoices.
- Limit of state capacity in handling cases: The Central and state administrations can intervene in only about 3 lakh cases in a year.
- Their capacity to track lakhs of transactions on a daily basis is questionable.
- Slowing economy: Already existing structural issues have been compounded by the slowing economy.
- There are certain options available to the government.
- First: Either recalibrate the expectation or carry on the efforts to plug the loopholes and the shortcoming in the system.
- Second: Lower the cut-off for composition scheme. A higher level simply encourages business “splitting”.
- Third: Reduce exemptions.
- Fourth: The council must deliberate on the rate structure, bringing it in line with pre-GST levels.