Goods and Services Tax at five: The new regime’s journey so far

News: The Goods and Services Tax (GST) has completed its 5th year since its inception on 1 July 2017. Recently, The 47th meeting of the GST Council has also taken place.

What is the reason for introducing GST?

Firstly, The GST replaced 17 central and state taxes and 13 cesses, eliminating the cascading impact of indirect taxation and laying the foundation for a common national market.

Secondly, Indirect tax regime was based on origin and was inefficient. This resulted in high costs accruing to the economy.

Thirdly, Many industries were uncompetitive under the old tax regime, and it altered choices of factory or warehouse location that should be determined by purely business considerations.

Fourthly, As per an estimate by the Federation of Indian Chambers of Commerce & Industry (Ficci), the overall tax burden on goods ranged between 25% and 30% prior to GST.

What is the reason for multiple tax slabs under GST?

GST Council considered two essential factors before arriving at a 5-tier rate structure.

1) Principle of equivalence: All items have been fit into rate slots nearest to the prevailing aggregate duty rates of all indirect taxes, 2) Safeguard the poor from inflationary pressure: Items with 60% weight in the Consumer Price Index (CPI) were exempted from GST, while another 15% were subject to just a 5% levy.

What is the status of GST in past five years?

-The proportion of the taxable value of goods and services covered under the lowest bracket of the ‘nil’ tax rate has gone up from 9% in 2017-18 to nearly 17% in 2019-20.

-Further, things that are in the highest GST bracket of 28% are estimated to have been brought down from 12% to 7.6% in 2019-20. Consequently, the effective GST rate had come down from 14.4% at inception to 11.6% in 2019.

-The GST-to-GDP ratio went up from 5.8% in 2020-21 to 6.4% in 2021-22, reflecting improved compliance (but not at the expected level).

-To promote MSMEs, the government has enhanced threshold exemptions from GST registration, quarterly filing of GST returns for taxpayers with an annual turnover of ₹5 crore, and a composition levy scheme, among others.

-Overall, in the five years (2017-18 to 2021-22) since the introduction of GST, the overall resource growth for states was 14.8% per annum, versus an annual average growth rate of 9% between 2012 and 2015.

What are the things in progress for GST Regime?

Firstly, A vast number of exemptions for products means that there is no input tax credit to claim by many taxpayers; it also means a smaller tax base, forcing a few items to bear the burden of offsetting the exemptions given to a large number.

Secondly, the GST system has been grappling with structural issues, such as multiplicity of rates and difficulty in enforcing compliance.

Thirdly, Rate rationalisation is important as the current overall rate is not revenue neutral compared to the taxes subsumed in the GST, which has been one of the biggest reasons for revenue underperformance.

Fourthly, The government has already extended the collection of compensation cess. If extended further, the Council would have to decide the growth rate at which the states will be compensated.

What are the updates on the recommendations of the four working groups?

The GST Council had constituted four groups of ministers to look into different issues.

a) The Council accepted the report submitted by the group of ministers (GoM) headed by the Karnataka Chief Minister on exemptions and correction of the inverted duty structure.

b) The Council also accepted the recommendations of the GoM headed by the Maharashtra Deputy Chief Minister on strengthening the GST system. The group, among other things, advocated better tracking of high-risk taxpayers.

c) The GoM headed by Meghalaya Chief Minister, which looked into areas such as online gaming, casinos, and horse racing has been asked to reconsider the concerns raised by some states.

What is the future of the GST Regime?

Utilise the data collected: GST regime has rich data. This can offer very useful and penetrating insights into the health of the economy and trends in economic activity from a cyclical perspective.

Revenue-neutral rate: Moving to the revenue-neutral rate with fewer slabs would help boost revenue for both Centre and states.

Thus, GST would make an ongoing contribution to sound public finances, but also sound policymaking by the Union and state governments,

Source: The post is based on the following articles“Goods and Services Tax at five: The new regime’s journey so far” published in “Livemint” on 30^th June 2022.

“Next stage for GST” published in “Business Standard” on 30^th June 2022.