Bring big-ticket items into the GST net

WHEN the Goods and Services Tax (GST) was launched seven years ago, on July 1, 2017, there were many fears over its implementation. The decision to go ahead with the launch was considered reckless, given that the country was barely recovering from the chaos of demonetisation the year before. There were dire predictions by economists and tax experts that the tax would fail in its aim as the country was not ‘ready’ for it. It was then Finance Minister Arun Jaitley who took the call to introduce the tax without any further delay. This proved to be the wisest move, as it would have taken an inordinately long time for the stakeholders in the economy to be fully prepared for the development.

The original concept of a single-point levy will remain unachievable unless large segments of the economy are brought under its purview.

It must be recalled that the concept of the one-point tax had already been deliberated on for about 18 years. The idea of replacing the innumerable indirect Central and state taxes with a single levy had been mooted way back in 1999 at the time of the Vajpayee government. The proposal emanated from the Vijay Kelkar task force, which recommended a unified tax system to simplify compliance and promote economic integration. There were also studies showing that the countries that had adopted this system benefited in terms of improved efficiency and enhanced economic growth.

An empowered committee of state Finance Ministers was set up in 2000, which was headed by then West Bengal Finance Minister Asim Dasgupta. This was the forerunner of the present GST Council, which represents all states to ensure that revenue issues are considered by the Centre and the states in a consensual manner. It was this committee that prepared the first draft of the Bill and carried out complex negotiations to bring all states on board. The process took nearly two decades, but there remained hesitation over the launch even after broad consensus was achieved in 2016.

One reason was the complexity brought into the original concept of a single-point tax. This stemmed from the states’ worries over losing revenues from the existing taxes. The result was a multi-layered system that is still in operation. So, there is an integrated GST levied on the inter-state movement of goods along with Central, state and union territory GSTs. Plus, there are four tax slabs, ranging from five to 28 per cent.

Not only that, states insisted on keeping the two biggest cash cows in revenue terms out of the purview of the GST. That is, petroleum and alcohol. The biggest concern at the time of the launch was whether the states would be able to manage with the resources mobilised through the new indirect tax. All these fears have now been shown to be completely misplaced. In fact, revenue mobilisation has soared far beyond expectations. The latest data shows that GST collections touched Rs 1.74 lakh crore in June, compared to the average monthly inflow of about

Rs 90,000 crore in the first year of its implementation. In addition, a Reserve Bank of India study has shown the states’ share of own revenues has risen in the last two years compared to the pre-GST era.

This means that the states may be able to manage without relying further on the compensation mechanism built into the GST framework at the outset. It was initially meant to be for five years, but it has now been extended as a result of Covid-19 till 2026. In case revenue buoyancy continues, it may be possible to finally end this provision.

Overall, there have undoubtedly been many hiccups in the implementation, especially in reducing red tape and simplifying procedures. But the GST Council, in which all states are represented, meets regularly to iron out problems and carries out firefighting wherever needed. The initial problem was to bring small and tiny businesses into the GST network by introducing computerisation. The disruptive effect on the small industry was tremendous, to the extent that the GST was reviled as being destructive to it. On the contrary, it has ended up bringing lakhs of small enterprises into the digital economy.

A major fear was that the GST would create a higher tax burden for the common man. This has also been proven groundless as studies now show that 60 per cent of consumption items face the lowest tax slab of five per cent or nil tax. On the other hand, only three per cent of consumption items face the heaviest tax of 28 per cent.

Yet, there is no getting away from the fact that it is time to carry out rationalisation of the GST rate structure. The original concept of a single-point levy may not be achievable immediately, but the tax slabs need to be reduced to achieve more simplicity in the long run.

The other critical step needed is to bring big-ticket items into the GST net. This includes petroleum, though electricity and land are now also being mentioned for inclusion. As a first step, petroleum products like aviation turbine fuel and natural gas could be brought under the purview of the GST, though it is also high time for the inclusion of petrol and diesel. Alcohol is difficult to touch as it remains a sensitive commodity for states. Taxation from this sector brings considerable revenues, but it will also have to be roped into the GST net sooner rather than later.

In its recent meeting, the GST Council took some business-friendly measures to help micro and small enterprises by giving amnesty on legacy disputes and raising the ceiling for appeals on disputes. The need for a GST appellate tribunal is similarly being felt, as appeals on disputes need to be dealt with rapidly.

There is much that can be done to improve the implementation of the GST, and this includes further simplification of procedures and rationalisation of rates. Yet, the original concept of a single-point levy will remain unachievable unless large segments of the economy, like petroleum, are brought under its purview. The Centre has to take the initiative, but the states also need to adopt a rational and long-term view so that the GST can fulfil its avowed objective of speeding up economic growth.