WHY IT'S THE RIGHT TIME TO REFORM GST

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WHY IT'S THE RIGHT TIME TO REFORM GST

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• Good times are back again: Indian economy saw seven months of shock contraction, but it now seems that good times may be returning. How? Various economic indicators like PMI Mfg., PMI Services, Core sector growth, PV sales, railway freight etc. are doing good.
• The GST: For October, the GST collections were Rs.1.05 trillion (10% rise, y-o-y), the highest in FY 2020-21. This was a great relief for all governments, as the compensation may improve now, although the trend needs to sustain. FY 20-21 has seen the worst downturn in federal relations in India due to revenue stress.
• GST increase: The latest increase came by varying magnitudes in Central GST, State GST, IGST and Compensation Cess. All states saw rising SGST, with the large ones having it more than 20%. This is cause for cautious optimism, as the rise is not only due to released pent-up demand (lockdown relaxations commenced August). And October 2020 wasn't festival season (inauspicious days, and subdued Navratri).
• Poor job scene: Though the economy is recovering, the jobs scenario remains dismal, impacting income and consumption both. But overall, GST which represents goods and services consumption, may rise. This is the time for reforms.
• First factor: Perhaps the sudden uptick is due to the introduction of "e-invoice system", for turnovers exceeding Rs.500 crore (total 48000 taxpayers). These contribute more than 45% to total tax. In large firms, the input tax credit is very large, and chances of fake invoicing (through subsidiaries) ever present. Since the GSTN technology to check this is not functional today, fraud is rampant. So, if e-invoicing is working, time to increase coverage to lower turnover slabs soon.
• Stark numbers: Taxpayers with turnovers above Rs.10 crore are 0.48% of total registrants, but account for 80% of turnover and 65% of taxes. If these are covered in e-invoicing, the fake invoice industry would die.
• Second factor (reform): The GST Council should quickly prune the exemptions list, and implement the reverse-charge mechanism. It will broaden the base and raise compliance. Reverse charge is where receiver is liable to pay the tax, not the supplier.  The way TIN changed income tax compliance from 2004, the use of tech can change GST. (TIN - Tax Information Network)
• The TDS story: The CAG had complained that many firms were deducting, but not depositing, the Tax Deducted at Source (TDS). Hence, the govt. asked NSDL to implement the TIN system, and soon, Centre's direct tax to GDP ratio went from 3.9% (2003-04) to 6.4% (2007-08). India can do the same for GST also.
• Third factor (reform): The whole structure itself needs to be changed, starting with eliminating the inverted duty structures (tax rates on inputs higher than those on outputs). It is true for plastic bags, solar modules, railway wagons, and so on. Then the exemption list (148 items) needs to be pruned, so that the structure become easy, equitable and price delinked. Then, professionals must be properly covered under GST including lawyers, doctors, architects, and contractors.
• Fourth factor (reform): Reduce the number of tax rates (slabs). It makes things simpler instantly, by ending classification problems and inverted duty structures. More than 80% of countries using GST have just one tax rate. India can go for 1 or 2 rates.
• Three rates: The govt. wants to have (a) a general rate, (b) a sin goods rate, and (c) a merit rate. A rate of 15% can be found, by compressing 12% an 18%. Sin goods list may be reduced as well, and passenger automobiles and building materials may be removed first. Tax these at general rate, to aid economic recovery, via multiplier effects. 
• Fifth factor (reform): Relieve all domestic trade taxes paid on exports. For this, electricity and petroleum must come under GST. Export competitiveness would go up, if electricity from Seventh Schedule's State List (Entry 53) is removed. 
• Time is now: The central government must persuade the states for these reforms, and take a quick action as economy starts to recover.

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