GST system needs a thorough reboot urgently

The GST system now needs a complete overhaul, if it is to remain fruitful for all participants.

 GST system needs a thorough reboot urgently

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• The story: The GST promise has remained largely unrealised even four years after its launch, as cascading of taxes hasn't ended and the opacity of a multi-rate system coupled with problems in assessing liability, tax burden and tax incidence continues.
• What states did: Indian States surrendered their fiscal autonomy, and are stuck with little headroom after the GST shortfalls. The first five years (of compensation period) will end in 2022 - what happens next? Will a GST 2.0 arrive, or the same flawed system continued? The huge power asymmetry between centre and states is a concern.
• Growth of the system: India's GST is directly linked with national GDP. The nominal growth rate of GVA (gross value added) impacts collection. From 2017 onwards, GVA per quarter was Rs.40 - 47 lakh crore, and GST revenues were Rs.2.7 - Rs.3.1 lakh crore.

1. So Tax to GVA ratio is 5% to 6.5%, but GVA rise was much higher (so clearly evasion, lower tax rates, exemptions are hurting)
2. The core problem of GST in India is the power imbalance in its structure, in favour of a powerful Centre
3. There is no adjudication body to resolve disputes between states and Centre till date, though the 115th Amendment Bill 2011 (GST Bill) had the provision

• First major problem: All states - regardless of size - get one vote (total two-thirds vote), and centre has one-third vote. So with the support of 12-13 states (BJP ruled), whose GST collection is just 5% of total - all bets are in Centre's favour alone. Larger states have lost all power, and feel cheated in this. As the 14% compensation comes to an end, states will be hit hard - the medial growth rate of subsumed taxes (pre-GST) is only 11% (and in many states just 5% to 10%). Median subsumed tax buoyancy is less than 1 (so with 1% growth, 0.75% tax growth will happen). So States will demand continuation of compensation scheme, at a higher rate.
• Second major problem: The tax structure is such that 45% of commodity value is not covered in GST at all, e.g. petro products. States that export or have inter-state transfers (or mineral and fossil fuel extractions) are not getting revenues as origin States (so need compensation). Most trading and retail firms are out of GST purview, and at the retail level, everyone is passing off the burden to the consumers (whether ITC needed or not), thereby leading to large losses.
• Third major problem: Exemptions from registrations has eroded the GST tax base, compared to tax base of pre-existing VAT. Exemptions motivate firms to remain below the radar, and evade taxes. Multiple rates are being applied at different stages, which is counter-productive (a single uniform tax rate for all commodities and services at all states, inputs and outputs, is needed). India is amongst the few that have more than one rate.
• Fourth major problem: As petro products are outside GST, the centre is earning huge sums by levying cesses (not shareable with states) and reducing the central excise (shareable); states would now want petro products under GST. Equity demands bringing petro products under GST urgently - it is also creating huge cascading and record-keeping problems.
• Fifth major problem: Several problems in filing processes have continued, and though fradulent claims of ITC (Input Tax Credit) have dropped, but still they are high.
• Learning: Overall tax base erosion has happened, and both policy- and compliance-gaps have to be plugged urgently. Else without proper tax info, infra and base, States will resort to selective tax enforcement (which will hurt voluntary compliance). If it continues, states will opt out of it (end of the grand bargain). Hence, it's the right time now to launch the GST 2.0.

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