GST at four: A dive into the milestones and the unfinished agenda

GST Council must maintain revenue momentum, simplify rate structure, and strengthen cooperative federalism in spirit and letter

The Goods and Services Tax, India’s most recent indirect tax reform, completes four years on Thursday, July 1, 2021. The introduction of GST marked a new chapter in India’s taxation, one that changed the working of businesses overnight. 

When the tax was introduced, it strained the working capital requirements of several companies by calling upon them to pay the tax upfront before the business was financially transacted. Soon after, enterprises faced another hurdle in the form of increased monthly compliance. This was balanced by rate reductions that caused severe revenue shortfall year after year. Then, the pandemic struck, and something that had been expected since its inception was achieved: a sequential and fast growth in monthly revenues. 

But higher revenue each month is not the only outcome of GST. There are downsides too.

Many small businesses still complain that the system, with all its efficiency, digital nature, and checks and balances, suits big companies the most. Small and medium enterprises are still facing cash flow problems. There has been a clamour to ease compliance once and for all for them. 

While the number of items in the 28 per cent tax slab has been brought down during the past four years, rate rationalisation has been achieved only partially, and a lot of work remains to be done in this area. 

Finally, the GST, managed by a federal body called the GST Council, was envisioned to be a working model of cooperative federalism between the Centre and the states. But the four years have often been witness to disagreements and fallouts between the two. The spirit of consensus evident in the initial meetings of the GST Council—led by the Centre by supporting states’ demands wholeheartedly—has dwindled, and states continue to fight with the Centre on many issues, GST compensation being the chief bone of contention. 

The finance ministers of Kerala, West Bengal and Punjab have been at the forefront of the Opposition in the GST Council. In recent months, after a change in power, Tamil Nadu finance minister P T R Palanivel Thiagarajan has emerged as a new critic of the Centre’s policies. 

Revenues sluggish till the pandemic, strong after that

Monthly cash collection under GST crossed Rs 1.4 trillion in April 2021, substantially higher than the monthly average of Rs 95,000 crore till that point. Though the collection in May shows a substantial dip due to economic restrictions during the second wave of Covid-19, the upward trajectory may resurface as the economy gets back on track. 

Most of the revenue growth has happened in the pandemic year 2020, which according to the government and experts, is a result of better compliance, using data analytics in innovative ways to curb evasion, and marrying income tax data with GST data. 

The government also gives credit to the e-invoicing mechanism for the revenue boost, which was virtually absent when the first e-intervention--that of e-way bills--was implemented in 2018.
 

Looking at it another way, the average tax amount paid per return in the country came back to its usual levels in December 2020, suggesting that the impact of the first wave had waned to a great extent by the end of the last calendar year. Monthly summary input-output returns reached 10 million in December 2020, the highest ever. 

A tax reform, a political platform
 

The GST Council is a 33-member strong body, with two members representing the central government, 28 representing as many states, and three representing union territories with (proposed) legislature. 

The incongruence between the Centre and the states has been an indistinguishable part of GST till now. The points of intense debate have mostly revolved around timely compensation. The GST Act promises 14 per cent growth to states’ GST revenues every year till June 2022, with the Centre paying the shortfall if any. 

From the delay in paying out compensation to states in 2020, to the debate on extension in the sunset date for compensation, the topic has hardly been off the Council table. 

An interesting aspect of the GST Council is that it has not resorted to voting unless absolutely necessary. In fact, voting was not taken into consideration in the first two years. The Council took a vote only in one instance, in the one decision to reduce the tax rates on lottery tickets. 

The voting rules of the GST Council are such that none of the decisions can be passed without the Centre’s approval, as its two members command 33 per cent of the total vote. All states together account for 67 per cent of the vote, which is insufficient to overcome the barrier of the necessary 75 per cent to pass a resolution. 

 

The Centre has 19 states that are either BJP-ruled or aligned with the party, allowing it to nearly reach the 75 per cent mark. In fact, the BJP-aligned members in the GST Council have risen from 16 to 19 during the last four years. 

The political composition of the GST Council has thus largely remained friendly to the BJP-ruled Centre, with the Union Government consolidating its position due to regional electoral successes of the BJP.

Unfinished business: Rate rationalisation 

GST was originally envisioned as a simplified tax structure with fewer tax slabs, zero multiplicity in taxes, easier flow of input tax credit in the system, and reduction in the number of slabs after monthly revenues reached a level of comfort. 

But much of this is yet to see the light of the day. 

The committee led by former chief economic advisor Arvind Subramanian had suggested that the average GST rate should be 15.3 per cent to achieve revenue neutrality--a situation where the revenue grows in the same line of growth seen in the pre-GST regime. 

But the weighted-average rate of GST in India has gradually reduced, from 14.4 per cent during the beginning of GST implementation (May 2017) to as low as 11.6 per cent in September 2019. 

The rate rationalisation now would essentially involve raising rates on certain items in the 12 per cent slab--the most populated GST slab--to ensure that revenues continue their healthy trend once the economy opens up fully.