It's July, and the GST regime is flashing a seven up.
As Goods and Services Tax revenue has slingshotted to Rs 1.4-1.6 lakh crore a month in the last year from just around Rs 85,000 crore in 2017, the historic tax reform has earned itself a top spot in the list of economic achievements ahead of the 2024 general elections, prompting none other than Prime Minister Narendra Modi to term it a game changer for India’s economy.
The new tax regime also stands as a first-of-its-kind exercise in fiscal federalism for the country as states with diverging views and needs were persuaded to give up their fiscal sovereignty to levy taxes in lieu of a larger economic goal. As GST enters its seventh year, The New Indian Express chronicles its arduous journey.
Many a false starts
It took 17 years, three Prime Ministers and four Union Finance Ministers to transform the proposal on GST first laid out way back in 1999 into an act. To achieve this, the Indian parliament and 31 state legislatures approved five laws, namely, the Central Goods and Services Tax Act, State Goods and Services Tax Acts, Integrated Goods and Services Tax Act, Union Territory Goods and Services Tax Act, and the Goods and Services Tax (Compensation to the States) Act. This involved 200 pieces of delegated legislation and laws written in 16 languages. In fact, to give a final legislative shape to the reform, it took no less than 18 meetings over 10 months between Finance Minister Arun Jaitley and state finance ministers and others.
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It was Prime Minister Atal Bihari Vajpayee who first proposed the idea of GST in a meeting with his Economic Advisory Group comprising three former RBI governors, namely IG Patel, Bimal Jalan, and C Rangarajan. In 2000, he set up an Empowered Committee headed by state finance minister of West Bengal Asim Dasgupta to design a GST model. In 2003, the then finance minister Jaswant Singh initiated the amendment in the service tax provision and laws to include GST in some form. His team even presented a detailed report on GST implementation in other countries. Subsequently, the Vijay L Kelkar-led Task Force on the implementation of the FRBM Act of 2003 suggested a pan-India GST rollout to widen the tax net and improve revenue collections. Services, which account for more than 50% of the GDP, were not properly taxed during pre-GST era, which consequently had a low indirect tax-to-GDP ratio in addition to other inefficiencies.
First mention in the budget
But it was only three years later in 2006 that GST found a mention in the budget speech for the first time with Finance Minister P Chidambaram setting 2010 as the deadline for rolling out the new indirect tax regime. An Empowered Committee of State Finance Ministers presented the first discussion paper on GST in November 2009. But it was not to be, and the proposal lay gathering dust until 2011, when the then Finance Minister Pranab Mukherjee decided to give it another shot. However, the Constitution (115th Amendment) Bill introduced in the Lok Sabha in March 2011 too failed as it could not get the states on board on contentious issues such as compensation to the states, the inclusion of petroleum and alcohol, and entry tax subsumption. As a result, the GST regime, once again, remained more of an aspiration than a reality.
It finally took Finance Minister Arun Jaitley under the NDA government to move the mountain to integrate 17 central and state taxes and create a single interface for taxpayers. The new law eliminated tax on tax, and is credited with making the country's exports more competitive. While Jaitley and team can be lauded for their dogged efforts and getting the states on board, the implementation was far from smooth. In fact, the introduction of the new regime was so chaotic that critics likened the rollout to deskilling oneself by accident.
'Never a right moment to implement GST'
But, as former chief economic adviser Arvind Subramanian noted, there's never a right moment to implement something as vast and as complicated as GST. By his own admission, preparation could have been better in some respects, but, he pointed out, what's more important is not whether you’re well prepared or not, but whether you have systems that can respond to the problems. If technical glitches spoiled the show on one side, it was the rate structure that complicated matters on the other. India's GST is unique compared to its international peers, which largely adopted a unified GST system where a single-rate applies across the country, with the exception of a few that follow a dual rate. For instance, China introduced GST way back in 1994, while Japan was much ahead of China, having rolled out a consumption tax rate of 3% in 1989. If it's any comfort, Malaysia did take longer than India for the planning stage, taking no less than 26 years to debate, discuss and deliver its version of GST. Still it implemented the scheme ahead of us, in 2015, and with a single rate of 6%. Countries like Australia, New Zealand, Singapore, Austria, Sweden and Pakistan are others that have implemented single-rate GST schemes. Others like Canada and Brazil follow a dual structure, ensuring that both the Centre and the states have an equal stake in intra-state products and services.
The Indian system is relatively more complicated, involving a Central GST (CGST), State GST (SGST), and an Integrated GST (IGST). As for tax rates, goods and services are classified into different tax slabs, comprising 0%, 5%, 12%, 18%, and 28%, with some goods attracting additional cess.
Tax evasion remains an issue
Six years after its rollout, monthly collections have remained above the Rs 1.4 lakh crore mark for 15 months in a row. However, tax evasion continues to be an issue with some estimates suggesting that the exchequer has lost as much as Rs 3.08 lakh crore to fraudsters since GST's rollout. That said, the number of GST registered taxpayers more than doubled from 67.83 lakh in July, 2017 to 1.40 crore, as on June, 2023.
Meanwhile, the Goods and Services Tax Network (GSTN) has improved the efficiency and effectiveness of tax administration. But as the Comptroller and Auditor General observed last year, there have been several inconsistencies on this front, and the reliability of GSTN data needs a complete makeover. While improving the technological interface and efficiency is one aspect, two other elements that need immediate attention are rate rationalization and the inclusion of items such as petroleum products, alcohol and electricity within the ambit of GST framework.
Given the forthcoming assembly and general elections, none expect the GST Council to act in haste as far as these topics are concerned. However, even as a consensus on including passenger fuel does not look like an immediate possibility, nothing stops the Council from including aviation turbine fuel (ATF) and natural gas into GST's fold. Indeed, such a move could be a good finisher for the Council's milestone 50th meeting this month.