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The way forward for the still evolving GST set-up

opinionThe way forward for the still evolving GST set-up

For reaping its fuller benefits, the Union and State governments must work together.

At 5 years of age, the Indian GST is not yet a fully baked product. The new regime has created an edifice which is capable of being further built upon. The concept upon which it has been based has merits, both from an economic efficiency point of view as well as the potential financial outcomes from it. To materialise the benefits more fully and expeditiously, the responsibility of further constructing upon it, with an agreed architecture and along a road path at a pre-set pace, has to be assumed both by the Union and each of the constituent states and the union territories. Even though continuing to have the sovereignty in tax framing, as reiterated recently by the apex court, the provincial governments must remain wedded to the idea of “one nation one tax” and not think of revisiting the well-intended fiscal arrangement in part or full. Otherwise, it would tantamount to throwing the baby out with the bathwater.
The Central and the provincial governments had, after protracted and meaningful deliberations, knowingly agreed to share their constitutionally endowed rights and responsibilities. Hitherto, no irresolvable issue has come up, though frictions, minor and substantive, might have, not unexpectedly, cropped up. Working together in the GST Council, of which 47 rounds of meetings have hitherto been held, there is a degree of understanding of each other’s strength and limitations. Undoubtedly, that has to be reinforced in an environment of greater trust and bonhomie. As in a marriage of two grown-ups, the minor irritants and the less-than-happy past experiences have to be glossed over while making all-out efforts to make the alliance succeed and happier in the future. The GST arrangement is a similar one of convenience as well as necessity.
The achievements hitherto have been quite a few though alongside there have been several hiccups and missed opportunities. Yet the plusses outnumber the minuses. The fledgling work-in-progress calls for care and ownership by the Centre as well as the states. After threadbare mutual discussions, including studying the best practices followed where this particular model of indirect taxation has worked well, and taking advice from relevant stakeholders and experts, they need to action their joint efforts. Only with such an accommodative approach, its scope can be widened to reap its inherent benefits more fully and expeditiously.
Amongst the foremost requirements for maximising the yields from the new tax regime is extending its coverage. With our GDP consisting now more of services than goods (55% vs 45%), it is imperative that virtually all services are brought under the purview of the new tax. At present, under a half of the services, in value as well as physical terms, are levied a GST. This makes for an unsatisfactory state of efficiency as well from point of view of equity. Both these have been considered the essential tenets of taxation. Such is the situation in case of the organised or the formal sections of the services’ economy. In the informal or the unorganised portions of it, the position is more precarious. A taxation rationalising process would necessitate that the entire range of provision of services is made liable for the payment of the applicable taxes and an easy collection cum compliance system is put in place. Unlike merchandise, exhaustive lists of classification of services for excise or customs duties, or for that matter even for precise estimation of their contribution to GDP, have not yet been drawn up in India. That no doubt, poses challenges to their fuller coverage under the GST.
Within the goods division as well, there is explicit requirement for greater coverage. Several items of significant value were ab initio excluded in 2017 when the switchover to the new tax set up was effected. The more prominent ones amongst those which are amenable to immediate inclusion under GST are electricity, aviation turbine fuel (ATF), natural gas and alcohol. Once the revised taxation arrangements for these four products have stabilised, the GST Council must quickly move to bring in the remaining, viz., petrol, diesel and the left-out petroleum products along with real estate and the underlying land. Hopefully by then, the Covid pandemic would have subsided and the inflationary pressures mitigated. Bringing these under GST would not necessarily imply imposing a higher than existing rate of taxation which might result in higher selling prices and inflation. The existing levies on petrol and diesel of Centre and States put together, despite the recent reductions, are above 40% ad valorem. Putting them even into the highest tax slab of 28% would lower their per unit cost by at least 12%. This, of course, presumes that the Centre would not henceforth consider any of these 8 items to be “sinful” and liable for its surcharges and cess.
Besides extending the scope of items under the GST regime, there is urgency to revisit the exemptions or the zero-rated goods and services. No doubt, given our low levels of per capita income (still hovering around $2,000, the threshold for defining a low income country) the Indian GST rates have to reflect the concern and consideration for the poor and indigent. To start with, in 2017 itself, the Council had zero rated or included in the lowest 5% slab, far too many products and services. This was a status quoist exercise in nature as a joint call had been taken by the States and the Centre, that every item under GST be made liable for about the same level of taxation as before. That necessitated living with decisions taken under the past era pulls and pressures and postponing to a later day the process of rationalisation required under the new tax regime.
In fact, in the reviews undertaken by the GST Council during the first three years, the exemption list had come to be sharply lengthened, At first, the 2019 general elections and later the setting in of Covid-19 in early 2020, had prevented an exhaustive review of the taxable lists and, in fact, compelled expanding the list of zero or low rated items. In the prevailing situation, with the next national elections being about two years away, and the pandemic ebbing, a window has now opened to effect a rationalisation of the exempted list of products and services. Understandably, the essential foods consumed by the common man and the life-saving drugs would have to remain zero or low rated. Yet as per experts of public finance, the existing list of exempted goods and services can be pruned by one-half. That would bring it to the same level, as had prevailed in 2017-18 viz about 9% from the current 17% in tax value terms.
Going forward, the number of tax slabs call for a reduction from the prevailing 5—zero, 5%, 12%, 18% and 28% (diamonds in view of their high value have an individual item rate of 3%). Too many slab rates offer the unscrupulous assesses and the taxmen the scope to play around with the applicable tax rate on a particular product or service. Administratively also, so many categories pose problems in designing of compliance forms and returns, levying of taxes besides disproportionately straining the already inadequate IT infrastructure. In most developed nations, there are only one or two rates. In India, however, that might remain a distant goal in view of the case for a list of merit goods attracting zero or low 5% taxation, and having a separate category for high taxation for items of discretionary purchase and considered luxe in character.
Reportedly a group of ministers has been looking at reducing the number of tax slabs for some time now. But concerned with the possible adverse impact on inflation as well as the collections, it has been dithering in finalising its recommendations. To start with, it is feasible to consider merging the 12% and the 18% categories into a new slab. In terms of averages, this could be a new 15% slab. That would not cause any significant impact on the aggregate revenue. Simultaneously, to maintain the buoyancy of revenue from the “sin” goods currently attracting 28%, the slab rate could be raised to 30%, but without the Centre imposing any cess on the items in that slab. At the current rate of 10% cess, the incidence already works out to 30.8%. Lowering of the tax rates from the items in 18% to 15% category should make for better compliance, while such an advantage might get offset by the items moving from the prevailing slab rate of 12% to 15%. While not much advantage may be expected from raising the tax rate from 28% to 30% when accompanied by the removal of 10% surcharge/cess, the higher tax paid at 30% would become eligible for the input tax credit on the entire 30% and not just at 28%.
It is also worth making the process of decision- making by the GST Council fully consensus based. This would be much like the resolutions passed by the UN bodies including the all important Security Council. Today’s arrangement, based on 33% voting right of the Centre and the remaining 67% being shared equally amongst the states, requires a 75% voting. For one, the states contributing more to the GST kitty than the smaller or less developed states, don’t find equal voting rights to be fair. Secondly and perhaps importantly, the new SC judgement calling the GST Council recommendations advisory (and not binding) creates room for states to subsequent disagreement and later on taking their individual positions in the matter. However, if they have been a party to the original Council decision, their case for taking independent positions would become weaker, at least morally.
At the end of the day, the big brother in the GST set up is the Union Government. To make the GST process a complete success, it has to assiduously work towards building a consensus amongst the states. Towards that end, it should hold informal consultations, at appropriate levels, with each state government, prior to the Council meetings. Undoubtedly, much of the growing mistrust, and the tardiness in progress made hitherto, is due to inadequate involvement of the constituent states. In turn, every state must get actively involved in drawing up the agenda of a council meeting. Thereafter, they must be given an opportunity in the ensuing meeting to lead the discussion on the subject proposed. Detailed deliberations on the finances of at least two states and the major challenges cropping up in the Centre’s budget through the year could be provided for in each GST Ccouncil meeting. That would make for greater understanding of each other’s difficulties and availing of the arising opportunities. While the chairmanship of the Council, for the time being, could continue with the Union Finance Minister, having two Vice Chairmen simultaneously, from the states on a rotational basis, could be experimented with. A sense of equality and comradeship is bound to emerge from such gestures, whether substantive or symbolic.

Dr Ajay Dua, a trained development economist, is a former Union Secretary, Ministry of Commerce & Industry.

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