Centre and states still have a job at hand.
Six years after its launch, the dominant commentary on Goods and Service Tax (GST) is mostly adulatory, thanks to the “big revenue gains” in the post-pandemic years. It is also believed that the tax has largely stabilised, with higher taxpayer compliance, and helped cross a major milestone in the journey towards “a pan-India single market” for goods and services. Though there is a perception that the comprehensive indirect tax has adversely impacted sections of small businesses, whose business model traditionally hinged on tax avoidance, this is seen to be a temporary trade-off against the substantial efficiency gains the tax is capable of generating. A more nuanced review of the design and working of the consumption tax will, however, reveal engaging facts. Six years into the GST regime, revenue hasn’t grown much, in relation to the gross domestic product (GDP)—the GST-GDP ratio remained a lowly 6.2% in 2021-22, the same as at the start, even as GST was by then about to complete five years; it marginally improved to 6.6% in 2022-23. The share of indirect taxes in the Centre’s gross tax revenue declined steadily from 53.4% in 2020-21 to 48% in 2021-22 and 46.5% in 2022-23, and is estimated to fall further to 45.8% in the current financial year.
Of course, state governments have experienced higher revenue buoyancy in the GST period compared to the previous VAT system, but this has largely to do with a massive sum of `8.2 trillion—over 10% of the gross GST receipts—that was transferred to them for the first five years of GST under a revenue guarantee rule. Significantly, the compensation monies were generated from additional cess on “demerit goods,” not from GST per se. The cess continues to exist even after the end of the special relief period, in order to service the special loans taken to bridge a deficit. Clearly, the incremental fiscal dividends from GST has been largely non-existent, at least until recently. Neither has it produced the desired “output effect” as taxing gets confined to only the value added at each stage, as is evident from continued stagnation in private capital investments.
The cardinal element of reformed transaction taxes like GST is that these structurally disallow cascading of taxes and apply on a broader base, so that rates can be moderated without revenue loss.
There needs no better proof of the flaws in the GST design than the fact that the GST Council is considering a major restructuring of the tax slabs that would necessitate reversal of rate cuts implemented over the last few years. Contrast this with the fact that several countries, after having shifted to value added taxes like GST in the past more than a decade, have maintained much lower rates and yet seen higher revenue buoyancy.
The Centre and states are at a crossroads on how to take the indirect tax reforms forward, given the stakes involved. There are discords over the division of rights to tax resources and administration, and “fiscal autonomy.” The Centre may reportedly push for “jurisdiction-free regime,” as a solution, but could face resistance in the GST Council. Things are in a flux. However, it’s clear that GST can yield superior results by minimising the innate regressive nature of indirect taxes, only if real estate and petroleum products are included in its ambit and the bulk of the supply chain is covered. Jurisdictional issues may be resolved in the spirit of cooperative federalism.
Source:financialexpress.com