Time for Centre to overhaul GST system
In policymaking, only a few things achieve total success, and a partial one rarely lasts. The torchbearers of the GST should bear that in mind as India’s historic indirect tax reform introduced three summers ago is far from reaching any of the stated goals, including the promise of a simplified tax regime, higher revenues or 1-2 per cent addition to the GDP.
As it entered its fourth year amid disappointing tax collections and unfulfilled promises, COVID-19 makes the forward journey tougher, though much of its underwhelming performance until recently was due its own making. Tax collections missed estimates, raking in only 78 per cent and 90 per cent of the budgeted targets in FY19 and FY20 respectively, causing severe fiscal distress to both the Centre and states, 60 per cent of whose revenue comes from the GST. Constitutionally, the Centre must honour its commitment of 14 per cent growth in state taxes or provide for the shortfall from compensation cess, which too is short of funds.
Experts believe one of the reasons for the poor show is the GST’s very design. It was kicked off with multiple rates, which then was essential to get states on board, but the gradual rate rationalisation leaves a lot to be desired. Eighteen months after former finance minister Arun Jaitley favoured a standard three-rate structure, the official diktat is nowhere to be seen. The system was replete with technical glitches, complicating tax filings and input tax credit claims, but allowed unfair profiteering and fake invoices.
The government must overhaul the system to first clear pending dues and avoid reoccurrence of backlogs. It should simplify the rate structure and stick with it in the medium term to prevent further uncertainty and chaos. Once economic recovery begins, the GST Council should get petroleum products and alcohol under its ambit to ensure uniformity. States will be unwilling to part with it as it dents their own tax revenue, but the Council must make the proposal attractive. Delaying these changes is unacceptable as the economic consequences will last beyond the NDA’s time in power.