What four years of GST have taught us about this tax regime

Source – Live Mint

Relevance: GST is one of the most important debt-free sources of revenue. An aspirant must know about the issues and challenges in its smooth implementation.

Synopsis – An analysis of 4 years of India’s GST regime

Myths regarding GST regime-

• First, GST will increase GDP growth by 1-2 percentage points –
  • However, GDP growth is only possible in case there is more income that gets spent. GST cannot increase GDP by itself, though it can statistically include the unorganized sector to an extent.
• Second, Inflation would come down with GST implementation
  • However, with deep contradictions in our tax structure, inflation will remain beyond the grasp of GST.
• Third, Government revenue would increase after GST implementation.
  • However, GST is a consumption-based tax, for government revenue to rise, the economy has to keep moving along and people have to spend.

Concerns with GST regime-

• Compensation to states- Due to the lockdown in 2020-21, States were concerned about tax shortfalls because of the implementation of GST.
  • The compensation cess was levied, and any compensation was to be paid from the compensation cess revenue. However, the [lockdown] situation is different due to the revenue shortfall because of the coronavirus outbreak.
  • GST (Compensation to States) Act, 2017- States were guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years [2017-22].
• Exclusion of petroleum from GST regime caused higher inflation- The government had kept petroleum goods out of GST regime to raise taxes to protect revenue.
  • Currently, taxes on petroleum goods are levied by both the Centre and the states. While the Centre levies excise duty (Rs. 33 per litre), states levy value added tax (VAT) (30% in Delhi).
  • This has to change, as an unintended consequence has been higher inflation.
    • Unintended consequence –
      • Prices of all commodities increase once transport costs increases.
      • Higher fuel cost leads to higher prices of food-grains and manufactured goods alike.

• Multiple rates for each product group – Globally, most regimes have a single rate. India has adopted a four-tier tax structure of 5%, 12%, 18% and 28% makes it complex like earlier regime.
  • Single rate for one product group will bring simplicity in the structure and make implementation easier.

Way forward-

The Government should continue to take measures to fulfill its promise such as-

• Petroleum to be brought under GST, both Centre and States taxes would be merged and fuel prices across the country would be uniform.
• There is need to reduce multiple GST rates into a single slab.