There finally seems to be a path forward for GST. Centre and states must strike bargain

Synopsis: After one and a half years of dispute, and with the economy showing signs of recovery, a path forward for the GST finally seems visible. This opportunity needs to be seized

What has set back the GST for the past year and a half?

Lack of revenues: In 2016-17 the various taxes that were folded into the GST yielded revenues of Rs 9.7 lakh crore (Economic Survey, 2017-18). But in 2019-20, the growth rate decelerated sharply. And in 2020-21, collections actually fell. As a result, there have not been enough resources to satisfy the needs of the Centre or the states.

Future collections have become uncertain: A gap opened up between the amount that the Centre felt it could afford to promise and the minimum that the states felt they needed and were entitled to.

Why, the path forward for the GST finally seems visible?

More recently, confidence in GST has improved. Collections have revived, averaging Rs 1.1 lakh crore in the first five months of the current fiscal year, exceeding even pre-pandemic levels.

Even more important, the GST’s past performance now seems much better than it once did. The weak revenue performance of the GST now seems attributable to wider economic difficulties and policy actions, rather than problems with the tax itself.

Consequently, most of the ingredients for a compromise are now in place. A sense that the country is in this together and confidence that sufficient resources will be available.

What can be done to seize the opportunity?

Three key changes are necessary: Re-casting compensation, simplifying the rate structure, and improving governance.

First, the principle of compensation must be re-cast because the original needs have vanished, and new ones have taken their place. The GST has reached maturity and well understood by producers, consumers, and tax officials. The states should give up their demand for an extension of the compensation mechanism, while the Centre should offer a new counter-cyclical buffer. That is, the compensation guarantee should be converted into revenue insurance.

The shift to revenue insurance, in turn, should allow the compensation cess to be abolished. Once it is gone, all payments could again be made from the consolidated fund of India.

Second, the GST structure needs to be simplified and rationalised, as recommended by the Fifteenth Finance Commission and the Revenue Neutral Rate report: To achieve the promised Good and Simple Tax, a new structure should have one low rate (between 8 and 10 per cent), one standard rate (between 16 and 18%) and one rate for all demerit goods.

The single rate on demerit goods also requires eliminating the cesses with all their complexity. For example, taxes/cesses based on the length of cigarettes are an absurdity deserving immediate abolition.

Finally, the GST Council’s working needs reform. Currently, all GST decisions were taken by consensus. But that can be sustained only if there is a shared sense of participatory and inclusive governance.

To make GST council more inclusive and participatory, the following changes can be implemented. For example, discussions in the Council could be steered by the central Finance Minister (Chair), aided by a finance minister (Vice-chair) from an Opposition state, rotating periodically.

The agenda-setting and technical work could be done jointly by these two, and they could even take turns chairing council meetings. The council secretariat would report to both officials.

Source: This post is based on the article “There finally seems to be a path forward for GST. Centre and states must strike bargain “published in Indian express on 16th September 2021.