Reforming GST

Source-This post on Reforming GST has been created based on the article “Reforming GST: It should be a priority after the elections” published in “The Business Standards” on 15 April 2024.

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

Context– One major reform in the last decade was the introduction of the goods and services tax (GST). However, its performance has fallen short of initial expectations for several reasons, and the economy hasn’t benefited as much as anticipated. Reforming GST

What is the latest data on GST collection?

1) In 2023-24, the total gross GST collection increased by 11.7% to about 20.18 trillion. This amount, calculated based on the second advanced estimate of gross domestic product (GDP), represented 6.86% of GDP.

2) After refunds, the collection reached 6.13% of GDP, an improvement from the previous year. But it’s important to evaluate revenue collection by considering taxes included in GST. In 2016-17, government revenue from these taxes amounted to 6.3% of GDP.

3) In this estimation,cess collection was included. If cess collection, designed to compensate states for revenue shortfall during the first five years of GST, had stopped, the present performance would not have been so good. For ex-excluding refunds and cess, GST collection falls below 6% of GDP.

What are the reasons for under-performance of GST regime since its inception?

1) There was premature rate reduction for many products due to political consideration.

2) Existence of multiple rate slabs have created confusion.

3) In many cases, there was a duty inversion, which impacted revenue over time.

4) There are basic design flaws in the system. As per RBI estimate in September 2019, after several rate adjustments, the effective weighted average rate dropped to 11.6% from the initial rate of 14.4% at the beginning of GST.

Read more– Five Years of GST: Achievements, Challenges and Way Ahead

What steps should be taken by the next government to reform the GST regime?

1) Revenue-neutral rate– It should nudge the GST Council to adjust to the revenue-neutral rate. This should be achieved simultaneously with rationalizing slabs.

2)Unified structure– There should be a unified tax structure for goods and services. Essential items may have lower tax rates, while “sin goods” could be taxed higher.

3) Inclusion of Petroleum Products-Petroleum products should be brought under the GST system.

4)Discontinuation of Cess– The cess has been extended until March 2026, but analysts think the debt used to pay compensation will be repaid earlier. Some suggest that the cess could be included in GST rates.
However, that wouldn’t be right and would go against the initial promise of GST.

Thus,there is a need for GST 2.0 that does not only aim to increase tax collection but also improve the overall indirect tax administration, enhancing the ease of doing business in the country.

Question for practice

Highlight the reasons for under-performance of GST regime since its inception?  What steps should be taken by the next government to reform the GST regime?