Need for Cooperative Federalism and Fixing GST Flaws

Source-This post on Need for Cooperative Federalism and Fixing GST Flaws has been created based on the article “Fix GST flaws to make it a ‘good and simple tax’ published in “LiveMint” on 17 June 2024. 

UPSC Syllabus–GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment. 

Context– Cooperative federalism in India has been struggling due to the current political landscape. The article argues that prioritizing the economy can serve as a unifying force, like how the adoption of GST in 2017 brought together the Centre and states.  

The article suggests that the Centre and states should use the upcoming GST Council meeting to address the shortcomings of the GST system. With monthly GST collections nearing ₹2 trillion, there is room to simplify the tax system and ensure stability. Need for Cooperative Federalism and Fixing GST Flaws

What were the original goals of implementing GST in India? 

1) It was introduced with the aim to simplify indirect taxation, eliminate tax biases and do away with cascading taxes through input tax credits. 

2) It aimed to make businesses more formal and increase the number of taxpayers. The goal was to cut costs and make the economy more efficient by simplifying how goods and services move through production and distribution. 

What are the issues with GST? 

1) Despite replacing numerous local taxes, GST in India is criticized for its complexity due to multiple tax rate brackets. 

2) States that impose high local taxes on petroleum products are concerned about revenue loss. This complicates consensus-building 

What should be the way forward? 

1) There is a need to simplify GST to ideally three rate slabs. This may improve the effectiveness of the tax collection process. 

2) GST coverage needs to be widened to include fuel, liquor, and other items left out earlier. To address states’ concerns about revenue losses, they could be offered a larger share of tax revenues or more than half of the GST revenue split.  

3) Gradually phasing out cesses, which states cannot access, may encourage greater cooperation. Nevertheless, it’s important to refrain from making commitments based on uncertain tax assumptions. 

The Centre and states responsible for GST must work together to improve it by simplifying the tax system and expanding its coverage. 

Question for practice 

What were the initial aims of introducing GST in India, what challenges does it face, and how can these challenges be addressed moving forward?