Making GST work

Only a simpler tax structure will increase compliance

The introduction of goods and services tax (GST) three years ago was one of the biggest reforms in recent history. GST was expected to attain multiple objectives, such as creating a single market for goods and services, simplifying the indirect tax system, improving compliance, and raising resources for both the central and state governments. Predictably, it was not easy to bring all states together and limit their powers to tax for the greater national good. Reforms were gradually being implemented in the indirect tax system and value-added tax was introduced in a phased manner starting 2003. In February 2007, the central government said a road map would be prepared for introducing GST from April 1, 2010. But the political process took longer than expected.

As the experience of the past three years has shown, India’s GST system has achieved a lot, given the challenges it faced. It’s critical to recognise the way the GST Council has worked. It has demonstrated its ability to resolve political differences. No wonder, it is often argued that a similar structure should be adopted to address other Centre-state issues. This also gives hope that the Council can work to improve the GST system. Further, GST has made India a single market. Trucks are not stuck at state borders any more and their turnaround time has improved significantly. Apart from increasing overall efficiency, this will also allow firms to plan logistics more freely. There are many more.

Obviously, it’s still a work in progress and a lot of ground needs to be covered. The biggest problem, of course, is revenue. GST collection has fallen short and, clearly, could not give the revenue boost that most people had expected before its implementation. This has resulted in fiscal management problems for both the central and state governments. There are a number of reasons for revenue underperformance, and they need to be looked into. For instance, the government adopted an extremely complicated structure with multiple rates; and India has still not been able to fix the filing system, which has affected compliance and collection. Fake invoicing has been a problem. Also, tax rates were cut in the run-up to the elections, which affected revenues. The general economic slowdown and now the disruption caused by Covid-19 have only multiplied problems on the revenue front. 

Therefore, once things settle down and businesses are back on their feet, the government would do well to review the performance of the GST system and address all pending issues. The idea should be to simplify the GST structure. It is now clear that the present structure will not help attain the stated objectives of GST. States must push for an overhaul because they cannot depend on compensation for the shortfall in revenues. Policymakers should also consider bringing petroleum products within the ambit of GST. This would help businesses and improve overall efficiency. Some of the rulings given by the GST Authority for Advance Rulings justify the demands made in many quarters that the process needs to be streamlined. Further, all technical issues in terms of filing should be addressed immediately to make the most important tax reform work.