India's GST ecosystem - Status update

The story: Any new system generally stabilises within five years, if all other things behave normally. But the goods and services tax (GST) has had to

India's GST ecosystem - Status update

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• The story: Any new system generally stabilises within five years, if all other things behave normally. But the goods and services tax (GST) has had to face unprecedented challenges as it enters its fifth year. It had to contend with a minor global economic slowdown in 2019-20, and then the Covid-19 pandemic struck.
• Fewer slabs: It is time to overhaul the tax rates by gravitating towards a three-rate regime, with the 12% rate being merged into the standard rate, or have some similar schema.
• Report card: GST has made good gains. The average monthly revenue from GST (till February 2020) grew at a compound annual growth rate (CAGR) of more than 9% — despite the effective weighted average tax burden coming down around 4 percentage points. Checkposts were removed. Multiple and complex compliance burdens became redundant (17 different taxes merged into one, and two statutes replaced about 150 different ones). One return format replaced about 100 different return forms, a largely semi-manual tax reporting system across the country gave way to a single online core reporting system. The number of registered taxpayers more than doubled during four years, despite an almost two-fold increase in the registration threshold. And inter-state fiscal barriers came down substantially. It seems that GST may have done to the Indian economy what Sardar Patel’s political integration had done to the Indian polity.
• Consensual: The effort that went into building consensus on every issue, large or small, is borne out by the fact that the GST Council has not witnessed voting, except on one occasion, in its 43 meetings so far, and every state has been an equal participant to the proceedings. Despite this, murmurs have now increased about the very structure and design of GST. States are increasingly questioning the way decisions are being taken, and opposition-ruled states being sidelined.
• Other examples: Australia has a national GST, Canada has an agreement-driven harmonised GST, while the European common system of value-added tax (VAT) runs on multiple statutes. The concurrently levied dual Indian GST is unique to India’s federal structure. Other aspects of GST in India — place of supply rules, input credit mechanism, threshold and treatment of small taxpayers — are in accord with internationally prevalent good tax practices. The integrated GST (IGST) is a unique Indian construct that ensures transfer of tax to the destination jurisdiction with GoI in the role of a ‘partner-depository’, whereby it not only collects its portion of the dual GST but it also mediates the transfer.
• Two perspectives: Experts say that the GST structure and design is the DNA of the entire GST ecosystem has been built, and should not be changed at all. Some others say that alterations to it, with accumulated experience, are now needed in right earnest.
• What about compensation: The challenge is to compensate the states adequately during these difficult Covid times. The borrowing mechanism devised by the GST Council is a practical way out, and borrowings during 2020-21, together with the likely borrowings for the period till July 2022, are estimated to be about Rs.3.2 lakh crore. Even if the cess collection were to grow by 10% year-on-year, the amount borrowed looks likely to be repaid only by 2024. This would leave an almost equal amount to be paid to the states by way of arrears of compensation for the period of FY2021-22 onwards. Even if cess collection were to grow normally, it would not be before FY2026-27 that these would be paid out. But compensation at an assured CAGR of 14% (compared to the average 9-10% growth in sales tax collections in the three years preceding GST) is being demanded by states.
• Summary: As the 15th Finance Commission indicated, India now has to focus on strengthening GST, undertaking a review of the rate path, making it simpler to comply with, focusing on in-built, system-driven validations, designing risk-based administration and an effective mechanism for compliance verification.

 

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