GST has been a win-win taxation regime for the Centre and states

News: Recently, India’s chief economic advisor claimed that GST had led to a faster increase in revenues for states such as Tamil Nadu than the sales tax, which was collected earlier.

How GST is a win-win taxation regime?

First, definitions play a key role in comparisons. The definitional issue is important because the state’s own tax revenues (SOTR) include excise duty on alcohol and value-added tax on petrol and diesel. These are critical for revenues, but have nothing to do with the GST.

For instance, the growth rate of SOTR was 6.7% in 2015 and 2.31% in 2016. And, the growth rates were 9.07% in 2018 and 12.59% in 2019. Therefore, even if these two are compared, the growth rate is higher in years after the introduction of GST.

Second, it does not make economic sense to arbitrarily pick random years and present their compounded annual growth rate (CAGR) to present an argument without considering the prevalent macroeconomic situation.

Third, taxes are levied on the value of goods and services, which makes prices significant. High inflation years typically lead to higher revenue mobilization.

Since 2013, India’s inflation has moderated from double-digit rates to 4-5%. This moderation in inflation has also meant that tax revenues would grow slower than in the past.

Low inflation, high real growth and modest tax growth is good for macroeconomic stability. Considering this structural change in the economy, the revenue growth of GST is better.

Fourth, the data about revenue growth do not include compensation provided to states by the central government. The 14% compensation was decided based on the revenue growth rates in the preceding years, which had experienced higher inflation. As inflation moderated, revenues decreased which resulted in the Union government compensating states. It imposed an additional cost on the Centre.

Most important, during the pandemic, most states introduced lockdown-like restrictions but then also they were assured of their revenues because of the Centre’s commitment under GST regime.

What are the existing challenges with GST?

One, the revenue-neutral rate was 15% but due to various interventions by different state finance ministers, the weighted average rate has fallen to 11%. Also, these interventions have added too many exemptions.

Two, there are close to nine effective GST rates, which has added to the complexity of the taxation structure. States are also responsible for complex GST rates. Because, the tax is the responsibility of the GST Council, not the central government and the Council comprises the finance ministers of states also.

Three, states during lockdown have shown lack of caution while implementing ad hoc restrictions on economic activity or towards improving GST compliance.

What is the way forward?

First, though there are complexities, but GST represents an improvement over the older taxation system. GST has shown improvement in terms of revenues and efficiency. Hence, the new taxation regime should not be politicized.

Second, India’s former chief economic advisor had extensively reviewed GST to document the issues and has proposed simplification so as to further build on the gains derived from the implementation of GST.

Source: This post is based on the article “GST has been a win-win taxation regime for the Centre and states” published in Livemint on 14^th Feb 2022.