A grand tax bargain in danger of coming apart  

Source: The Hindu

Relevance: Issues with GST regime

Synopsis: A version 2.0 of GST may have to be designed sooner rather than later.

Issues existing with GST

• Non-expanding tax base: The tax base of GST does not appear to be expanding.
  • The Tax to Gross value addition (GVA) is only about 5% to 6.5% though GVA growth was much higher.
• Political architecture: The fundamental weakness of the GST is its political architecture.
  • In the voting, the central government has one-third vote and States have two-thirds of total votes (with equal voting rights regardless of size and stake).
  • With the support of a dozen small States whose Budget is mostly underwritten by the central government the game is hugely in the Centre’s favour.
  • With equal value for each States’ voting, larger and mid-sized States feel short-changed.
• Design flaws: There exist design flaws in the tax structure.
  • Nearly 45% to 50% of commodity value is outside the purview of the GST, such as petrol and petroleum products.
  • Most trading and retail establishments, (however small) are out of the fold of the GST.
• Exemptions from registration and taxation of the GST have further eroded the GST tax base compared to the tax base of the pre-existing VAT.
  • As multiple rates are charged at different stages, it goes against the lessons of GST history.
  • This tax works well with a single uniform tax rate for all commodities and services at all stages, inputs and outputs alike.
  • India stands out and is among the five countries to have four rates/slabs.
• Exclusion
  • Petroleum products remaining outside the purview of GST has helped the Centre to increase cesses and decrease central excise. Central excise is shareable with the States while cesses are not. Equity requires that petrol and diesel be brought under the GST.
• Compliance with GST return (GSTR-1) filing stipulation and the resultant tax information is not up to date.
  • The gap in filing GSTR-1 was 33% in 2019-20 and has been increasing.
  • Fraudulent claims of Input Tax Credit (ITC) are quite high.
  • Tax evasion, estimated by a National Institute of Public Finance and Policy’s paper, is at least 5% in minor States and plus 3% in the major States.

Conclusion

There is need to address policy gaps along with compliance gaps otherwise the grand bargain that resulted in the GST regime, will come apart.

Terms to know: 

• Input Tax Credit (ITC)
• GST 
• GVA