Six years of GST - I: How the new tax regime changed indirect taxation

I recall my days in the Haryana excise and taxation department in the early 1990s, when excise duty was the primary tax at the Centre, and sales tax in states. Many industrialists wo­u­ld come to me in those days complaining about the complex indirect tax system in the country, with each state having its independent tax structure and no connection to the tax system in the other states.

There used to be a local value-added tax (VAT) for intra-state movement of goods, and a central sale tax (CST) regime for inter-sate movement. CST was not allowed to be set off against local VAT in the importing state, while VAT credit could not be used to pay CST. Local VAT rates varied across states, causing a change in tax as soon as a commodity crossed the boundary of a state. Every state had a naka at its border.
 

Costs for businesses were heavy. As policymakers, we were always looking at tax structures in neighbouring states and devising systems to make our tax rates more attractive in order to attract businesses to our state. The other states were also doing the same — this only meant a race to the bottom for states and extreme uncertainty for the taxpayer.

This also meant that companies were constrained to maintain warehouses in almost every state where they sold goods, and their decisions were influenced more by state tax policy than being prudent business calls. Logistics, therefore, was a nightmare. As studies revealed, it was moreeconomical to import goods from a far-off country — both in terms of time and cost — than moving the same goods from one state to another.

The complexity did not end there. The Centre also had its own independent regime of central excise duty and service tax, with entirely different procedures and compliance requirements. Central excise and service tax compliance was required based on business premises rather than business entities. The central and state regimes did not speak to each other, which led to huge cascading and compliance burden for businesses. For example, a business having presence in 25 states would have to file as many VAT and CST returns, besides central excise and service tax returns based on its premises.

It took us very long before a consensus was reached, and goods and services tax (GST) was rolled out in the country on July 1, 2017, by subsuming more than 17 taxes, surcharges, and cesses. It was ‘one nation, one tax’ finally that contributed in bringing certainty and stability to the country’s many indirect tax structures. The nakas disappeared overnight. Compliance was extremely simplified, and the cascading burden was taken off, with the integrity of input tax credit (ITC) chain being fully ensured. Goods started moving seamlessly across the country, and business decisions were no longer influenced by tax regimes. This meant huge cost and resource saving for businesses, and increased compliance ensured they could compete fairly.

The first few years of the GST regime were marred by difficulties in implementation, especially the structure and technology. Some blamed the gov­­­e­­­r­n­ment for making very frequent changes in the initial period, but we need to appreciate that the government was nimble-footed and making necessary changes based on stakeholders’ feedback. In recent years, however, stakeholders’ feedback on GST has been positive.

The government’s GST revenue between 2018-19 and 2023-24 — including the period affected by the Covid-19 pandemic — grew at a compound rate of 12.3 per cent. This shows buoyancy of 1.25, which is no mean achievement, particularly as there were significant rate rationalisation, and increase in exemption threshold and composition limits. In fact, the revenue increase was 30 per cent in 2021-22 and 22 per cent in 2022-23, reflecting buoyancy of 1.4. Over and above this increase, the increase so far in the current year has been around 12 per cent. This implies GST revenues have stabilised and would continue to grow at 1.1-1.2 buoyancy in the medium term. This revenue increase has also made states accept the positives of GST, and the shrill voices from stakeholders, commentators, and especially states, have completely vanished. One can say that GST implementation has led to benefits for all stakeholders, be it the government — states and the Centre — and taxpayers.

The implementation of GST in the country was carried out with extreme sensitivity. Even as changes were being made to the structure and technology continuously, policy measures were also being taken to convince and cajole entities to come into the GST fold. There were no coercive or punitive measures taken in the initial period, as the intention was to draw as many people to GST as possible. The result is that the number of assesses brought under GST has more than doubled from just 6.5 million in July 2017 to around 14 million now.

There were many steps that helped in the success of GST. Read about these measures tomorrow in the second part of this column.

The author is former revenue and economic affairs secretary, Govt of India. The views expressed are his own