19 April 2024 : Daily Answer Writing

Q1) Critically evaluate the performance of Goods and Services Tax (GST) as a much-talked about measure for fiscal reform.

(250 Words/15 Marks)

GST is an umbrella, multistage, destination based indirect tax, which subsumed taxes like central excise, service tax, additional duties of excise & customs, VAT etc. The GST was launched at midnight on 1 July 2017. It was hailed as the biggest indirect tax reform of independent India due to its composition and envisaged impact.

About GST

1. It subsumes and replace 17 local levies like excise duty, service tax and VAT and 13 cesses.
2. Under GST, a four-rate structure that exempts or imposes a low rate of tax 5 per cent on essential items and top rate of 28 per cent on luxury items. The other slabs of tax are 12 and 18 per cent.
3. In the pre-GST era, the total of VAT, Excise, CST and their cascading effect led to 31 per cent as tax payable, on an average, for a consumer.

Six years since its implementation, there are questions whether GST- one nation, one tax has lived up to the expectations it promised. The performance of GST regime can be assessed from following points:

1. Increase in Taxpayers– Number of taxpayers registered under GST rose to 1.4 crore by 2022.
2. Increased compliance -High tax rates of the pre-GST era acted as a disincentive to paying tax, the lower rates under GST helped to increase tax compliance. More than 70 crore GST returns have been filed in the past six years.
3. Ease of doing business– GST brought in a conducive environment for businesses by easing tax norms and giving tax concessions to corporate.
4. One nation One tax-The multiple markets across India, with each state charging a different rate of tax, led to great inefficiencies and cost of compliance. Under GST’s vision of one nation one tax this problem was to some extent addressed.
5. Fiscal Federalism-GST also represents an unprecedented exercise in fiscal federalism. The GST Council, that brings together the Central and State governments, has met 50 times to improve the working of the mega tax reform

However, there are certain problems that persist in the current GST regime as discussed below:

1. Federal issues: Center has failed to fulfill its promise on compensating the states in case of revenue shortfall. This has put strain on center state relations. It also denied power to states to impose new taxes to make up for revenue shortfall.
2. Taxing medical equipments: Items like vaccines, drugs, PPE kits, masks, ventilators, concentrators etc. remained under taxed category for long time, increasing the cost of important medical supplies.
3. GST Collections– As per critics, while GST collections have soared over recent years, the rate of taxation needs rationalization to reduce extractive tax burden.
4. Problem of tax slabs– Despite best efforts the GST could not be imposed in 1-2 tax slabs. The concept of sin tax and exclusion of several products like alcohol, petroleum products have created problem for producer states.
5. Gaps in GSTN– CAG had highlighted poor backend management by GSTN in its audit report on GST. There are also concerns about fraud and money laundering.

Following measures can help address issues in GST

1. Loss for Manufacturing states– Ideally GST was to bring as much tax as the previous tax regimes, but GST being a consumption point tax meant manufacturing states like Tamil Nadu, Maharashtra had to bear loss. These states demand compensation for shortfall.
2. Revenue Guarantee– The income of states has seen a decline since implementation of GST, compounded by the expenditure due to Covid-19. In wake of end of Revenue Guarantee beyond 2017-22 period, alternative mechanisms for compensating states are needed.
3. Reforms in GST Council– Reforms such as more weightage to the states, clarity on suggestions of council for borrowing etc. is required.
4. Rationalization of rate structure as per global best practices (OECD etc.) should be pursued.

The GST reform has been a mixed bag of gains and missed opportunities. It requires modifications before it produces the kind of benefits that were talked about prior to its roll out.