GST- What worked and what's desired

 GST was a major reform in India and was launched at the sroke of a mid-night hour, an attempt made to draw parallel with India's moment of freedom. However after the froth and hype has settled around GST and now that it is in place for sometime now, let us evaluate on how it has fared so far and what else is required:

The Major gains from GST are as follows:

-          Uniformised various consumption and trade taxes particularly state VAT and central excise (excluding Petroleum and tobacco) and Service tax. Although the Petroleum, electricity and real estate taxes are outside the ambit of GST, still a large basket of goods and services are included. This has helped in making trade within the country relatively free flowing with no state competition on rates.

-          Cessation of inter state and intra state check posts1 which significantly fostered the free flow of goods across country and reducing transportation cost and time.

-          GST is a based on supply of goods and services and not on sales1. Earlier businesses had branch offices spread across states enabling Inter-state consignment transfers but given GST has harmonized tax rate across states, the branch offices and inter-state consignment transfers ceased helping a better supply chain management.

-          GST has significantly reduced cascading effect on taxes due to a substantially comprehensive input tax credit (ITC) mechanism1. Earlier as there were no ITC available for excise and service tax, the tax levied at manufacturing point was cascaded down to point of sale applying state’s VAT on Excise as well.

-          GST Council is a sort of miracle in the today’s otherwise tense federal environment. It was formed with an idea to create an administrative body constituting of union and state governments deciding on rates and procedures. As Dr M Govind Rao points out in his paper1, it can be a good model for inter state and intra state bargaining and dispute management body.

-          Slowly increasing GST collections are a sign of GST buoyancy. In Dec 2023, the GST collection was at Rs.1.64 Lakh crore which is 10.3% higher from the same month last year2. The April-Dec 2023 GST collections shown a 12.2% Y-o-Y growth at Rs.14.97 Lakh crore. It is noteworthy that this buoyancy is not just a phenomenon of economic activity but also the stabilization of GSTN platform as pointed out by Dr M Govind Rao3. From 1st August 2023, e-invoicing has been made mandatory for all businesses with greater than Rs.5 crore turnover4. This has improved compliance and better detection of fake input credit claims.

Additional measured required are as follows:

-          Finance ministry has notified that Jan 1, 2022, is date for norms making 100% Invoice matching mandatory5. Absence of any threshold on invoice value chokes a lot of administrative capacity on low value returns.

-          Multiple slabs in GST may have been a political requirement at the time of design, it requires to be re-looked at now with an eventual aim to reach a single rate structure (or practically 2). This prevents misclassification, litigations, inverted tariff structures and associated informalization/evasion1. For example, if GST on affordable housing is 1% and 5% on other housing without ITC, the suppliers of housing materials like cement which has a GST of 28% can sell in grey market to builders1 who can pay just 5% tax without ITC. Moreover, some items has compensatory cess ranging from 12% to 200% (Tobacco) adding to multiplicity of rates.

-          Keeping petroleum and electricity out of GST net creates significant cascading impact as ~40% of revenues come from petroleum1. This is one reason why transport other than air and premium train classes are non-taxable. This narrows the base significantly.

-          Exemptions list should be pruned as it currently has 50% of CPI basket1 to broaden the base. Equity issues should rather be addressed using expenditure.

-          As Dr Rao points out in his 2019 paper1, the infirmities in the rate must be rectified and same category of commodity must not be taxed using different rates (Hotel rooms/restaurants etc.)

-          As Dr Rao points out in his 2019 paper1, there needs to be a robust research team and database which can help deciding rates effectively and ensures transparency.

 

References:

1.       1) Evolving Issues and Future Directions in GST Reform in India (repec.org)

2.       2) GST collection rises 10% in December to Rs 1.64 lakh cr (msn.com)

3.       3) Let’s make GST a good and simple tax | The Indian Express

4.       4) New GST rules: What has changed for companies with more than ₹5 crore turnover from today? | Mint (livemint.com)

5.       5) Input Tax Credit for GST assessees only up to invoices matched from January 1 - The Hindu BusinessLine

6.     6)   GST Registration Thresholds, Exceptions, Examples | EZTax®


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