Context

After four years, the promise of the Goods and Services Tax (GST) remains substantially unrealised.

Why tax base of GST is not expanding

• The GST is strongly co-related to overall GDP.
• Revenue collection of the GST is dependent on the nominal growth rate of Gross Value Added (GVA) in the economy.
• Since inception, GVA per quarter has been between ₹40-lakh crore to ₹47-lakh crore and GST revenue has not been higher than ₹2.7-lakh crore to ₹3.1-lakh crore.
• The Tax to Gross value addition is only about 5% to 6.5% though GVA growth was much higher.
• Issues: A very large segment is covered by exemption, composition schemes, evasion and lower tax rate.

Five Issues with the GST structure

1) Dominance of the Centre

• The political architecture of GST is asymmetrically loaded in favour of the Centre.
• No body to adjudicate: There is no particular body is tasked to adjudicate if there is a dispute between States and between the Centre and the States.
• Centre’s domination: In the voting, the central government has one-third vote and States have two-thirds of total votes.
• All states have equal voting rights regardless of size and stake.
• With the support of a dozen small States whose total GST collection is not more than 5% of the total central government can dominate the decision making process in GST Council.
• Small states dictate the terms: With equal value for each States’ voting, larger and mid-sized States feel shortchanged.

2) Flaw in tax structure

• Nearly 45% to 50% of commodity value is outside the purview of the GST, such as petrol and petroleum products.
• Certain states not getting revenue as origin state: States which export or have inter-State transfers or mineral and fossil fuel extractions are not getting revenue as the origin States and need a compensation mechanism.
• The pre-existing threshold level of VAT has been tweaked too often which has led to an evaporation of tax base incentivising, enabling evasion and mis-reporting.
• Most trading and retail establishments, (however small) are out of the fold of the GST.
• At the retail level, irrespective of whether Input Tax Credit (ITC) is required or not, the burden can be passed off to the consumer.
• As a result, the loss could be as high as one third.

3) Exemptions

• Exemptions from registration and taxation of the GST have further eroded the GST tax base compared to the tax base of the pre-existing VAT.
• Ground for evasion: Exemptions are purely distortionary and also provide a good chance to remain under the radar, thereby directly increasing evasion or misclassification.
• Theoretically, exemptions at the final stages reduce tax realisation.
• Multiple rates: As multiple rates are charged at different stages, it goes against the lessons of GST history.
• This tax works well with a single uniform tax rate for all commodities and services at all stages, inputs and outputs alike.
• While most countries have a single rate, India stands out and is among the five countries to have four rates/slabs.

4) Exclusion

• Against the interest of States: Petroleum products remaining outside the purview of GST has helped the Centre to increase cesses and decrease central excise, in what would otherwise have been shareable with the States.
• Now, States will be keen on including petrol and diesel under the GST as their share of tax goes up in the process, even if there is a special rate fixed for it.
• Equity requires that petrol and diesel be brought under the GST.
• Cascading of taxes: Apart from the complexity it creates in record keeping and ‘granting ITC’, in the present form it also leads to a cascading which the GST avowedly tried to avoid.

5) Lack of compliance

• Compliance with GST return (GSTR-1) filing stipulation and the resultant tax information is not up to date.
• Fraudulent claims of Input Tax Credit (ITC) because of a lack of timely reconciliation are quite high though it has come down by two thirds.
• Tax evasion, estimated by a National Institute of Public Finance and Policy’s paper, is at least 5% in minor States and plus 3% in the major States.

Conclusion

Policy gaps along with compliance gaps do need to be addressed. Without proper tax information, infrastructure and base, the States would go in for selective tax enforcement. In the long run, voluntary compliance will suffer and equity in taxation will be violated.

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