Simplifying GST structure is the focus

downloadIt has been a year since the landmark goods and services tax (GST), which converted India into a single market, was implemented. Although India opted for an extremely complex GST structure, its implementation was still a big breakthrough as problems can always be addressed with experience. To be fair, the implementation of the GST should be seen against the backdrop of efforts made by successive governments to build political consensus for well over a decade. The idea was proposed by the Atal Bihari Vajpayee government. The first Manmohan Singh government articulated the intent of implementing it from April 2010. However, the Constitution amendment Bill to enable the introduction of GST was introduced in March 2011. It could not be passed owing to a lack of political consensus, and lapsed with the dissolution of the 15th Lok Sabha. The amendment was finally made in 2016.

Now that India has had the experience of running the GST system for a year, policymakers should focus on building on its successes and addressing its drawbacks to achieve its full potential.

Economists at the Union finance ministry studied GST data in detail and presented some interesting facts in this year’s Economic Survey. First, the Survey showed that India’s formal non-farm payroll is much higher than is commonly believed. The implementation of the GST, which is bringing more businesses into the tax net, will further push formalization of the economy.

Second, the GST is leading to better tax compliance. The number of unique registrations has now crossed the 10 million mark, which is higher than entities registered in the pre-GST period, though they are not comparable as indirect taxpayers had to register multiple times in the earlier system. The increasing number of taxpayers and better compliance should help raise higher revenue in the medium to long run.

Third, the GST system is creating a vast repository of data that could be useful in policymaking. For example, it is now possible to know the state-wise distribution of international exports. This information can be used to fine tune policies in particular states to boost exports. Per capita gross state domestic product has a high correlation with exports.

Further, the way the GST Council has evolved is a notable achievement. All decisions so far have been taken by consensus. It shows the way complex issues can be addressed through cooperation between the Union and state governments. While the council has a specific purpose, perhaps the idea can be used to address policy issues in other areas.

However, despite visible benefits, as has often been argued in these pages, the GST structure is far from optimum. The latest “India Development Update” of the World Bank, for example, noted that the 28% rate, applicable on a set of goods, is the second highest among the 115 countries sampled: 49 countries have a single rate and 28 have two rates. Only four countries other than India—Italy, Luxembourg, Pakistan and Ghana—have four rates.

It is important for India to simplify the tax structure. The first target should be to move to at least a three-rate structure—a lower rate for essential goods, a relatively high rate for luxury goods, and a standard rate for the majority of goods and services. In this context, the outgoing chief economic adviser, Arvind Subramanian, has rightly noted that the 28% rate should go. The GST Council can then work on further rationalization, though this would also depend on tax collection. In a recent article in The Indian Express, Subramanian (with Kapil Patidar)—on the basis of collections in nine months—showed that revenue went up by 11.9%, with implied tax buoyancy of 1.2. This was higher than the historical standard for indirect taxes. Revenue is expected to increase further as some of the implementation issues are addressed with improvement in compliance. The ongoing recovery in economic activity should also help raise GST collections and open up space for rate rationalization, which will help remove distortions in the system.

Apart from rates, some of the operational issues, such as those related to ease of filing and refund, need to be resolved. Delays in refund affect the working capital of firms and should be avoided, particularly in the case of exporters, in an environment of widening trade deficit. Further, the council will need to work on bringing items such as electricity, petroleum products and real estate into the GST net. This may not be easy; petroleum, for instance, contributes a significant chunk to state revenue. However, the inclusion of these items will make the system more robust and predictable.

As GST stabilizes and settles down, the council will need to continuously work on simplifying the structure to enable higher tax collection and economic growth.


Source: LiveMint


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