The Goods and Services Tax (GST) in India is now two years old. It is now time to look back and take stock of how it fared. Of the several objectives of GST, the ones relating to reduction of the tax compliance costs and transportation and logistics costs have been achieved by subsuming 17 taxes, and the abolition of Entry Tax (Octroi) and inter-state check posts; use of technology through GSTN, the IT Infrastructure, has also contributed by eliminating the human interface in on-line compliance of the tax.
Cascading of taxes, i.e. levying of tax on the tax paid at the previous stage of the flow of goods and services in the supply chain, has also been substantially reduced by providing the credit of the tax paid on the inputs at each previous stage. Thus, the ultimate incidence of tax has also been reduced.
As for the GST rates, the four-tier rate structure of 28%, 18%, 12% and 5% is broadly based on the principle of ‘capacity to pay’ and ‘who use the goods—poor, middle class, rich’. All these rates are lower than the aggregate of pre-GST rates of a particular item. But the problem arose with the fitment of items in different rate slabs. For example, more than 250 items were put in the highest rate slab of 28% that was meant for demerit goods and luxury goods. The position was corrected later by the GST Council, and now there are only around 28 items in the 28% slab. Thus, the incidence of tax has also come down.
As the revenue improves, there would be scope for merging the two rates of 18% and 12% into one slab in between, perhaps 15% or 16%.The target of making India a Common Economic Market has also been reached by ensuring same tax rates in all states and abolition of interstate checkposts.
Thus, the main objectives of GST were broadly achieved. Having said that, it is also true that there were certain glitches, both in technology and policy issues in the initial few months of its implementation.
Another collateral objective of GST was to formalise the informal sector by bringing it within the ambit of GST. To meet this objective, the threshold was kept very low at Rs 20 lakh annual turnover. Some of the aspiring ones among the Small Business who wanted to do business with Big Business, voluntarily joined the formal economy. But the non-aspiring ones who preferred remaining outside GST were unhappy. To add to their woes, two conditions were added. There will be no threshold benefit if the supply is interstate. So, the non-aspiring Small Business preferred to stay out of GST and stopped inter-state supply. The second issue was that the GST-paying Big Business that were purchasing goods from Small Business were told to pay GST on their behalf, on the supplies received from them, and then take credit. So, they stopped buying from Small Business.
Because of these two fetters on availment of the threshold benefit, the business of the non-aspiring Small Business suffered badly leading to closure at many places. Since the Small Business is estimated to contribute 70-75% of total employment, this also led to loss of jobs.
Complicated filing of returns was another problem that the taxpayers faced. Recently the GST Council has decided to have further simplified Return Forms named ‘Sahaj’ meant for Business-to-Consumer supplies and ‘Sugam’ meant for both Business-to-Consumer and Business-to-Business supplies. This will be introduced in a phased manner during July to September 2019 as a trial run. From October, it would be made fully effective.
In the first two years after the introduction of GST, the revenue collections have been falling short of target. For the current fiscal 2019-20, the overall target of GST revenue has been pegged at Rs 13.71 lakh crore up from Rs 11.48 lakh crore for the previous fiscal 2018-19. The required run rate for the remaining part of the year has been estimated to be Rs 52,830 crore. Achieving this would be a tough job.
One reason for such shortfall is tax leakages and tax evasion in large numbers. From the second year of implementation, the enforcement actions have started vigorously and good detections are being made. There will have to be further strengthening of anti-evasion machinery.
The Council will also have to seriously consider inclusion of petroleum products, alcohol, stamp duty relating to real estate and electricity in GST so as to garner more GST revenue.
Summing up, it may be said that India implemented GST successfully, notwithstanding the initial technology glitches and policy glitches. No doubt, the initial glitches gave the otherwise fairly well-implemented GST a bad name. But the GST Council acted very responsibly and retrieved the situation through course corrections in frequently held meetings. The Centre and all the states showed the maturity of our democracy by coming together in the spirit of cooperative federalism. Now, at the end of the second year of implementation, the time has come to expedite completion of the important pending work on GST reforms, some of which have been outlined in the preceding paragraphs.
Sumit Dutt Majumder
The author is former Chairman of the Central Board of Excise and Customs, and author of three books on GST/ EMAIL: sumitduttmajumder@gmail.com