Seven Years On, Transformational GST Is A Mixed Bag Of Hits And Misses

This anecdote may perhaps be apocryphal, but it echoes well if one were to assess the most ambitious tax reform in independent India’s history – the Goods and Services Tax (GST) system that completes seven years since it was introduced on July 1, 2017.

One cannot but recall the huge challenges and potential pitfalls, which could have derailed the reform. It required political determination and a huge leap of faith in a fiscal taxation system that required both the Centre and the states to substantially surrender each other’s fiscal powers on several counts.

The fact that an unique institution, the high powered GST Council, consisting of representatives from all the states with constitutional endorsement also came about was reassuring. 

The Council is an embodiment of pooled sovereignty and cooperative federalism. It has held 53 meetings since its establishment, steering the course of GST over the past seven years. The Centre too has shown remarkable maturity in willing to take the revenue risks and assuring the states of compensation against any possible shortfall arising from the new system in the first five years. The assurance came as a  Constitutional amendment. 

This in a microcosm is the story of GST – the many concessions that the Centre and the states have wilfully trade to get GST up and running, to ensure it works.

The GST has been an outstanding success in subsuming the multiplicity of indirect taxes in the country, permitting the seamless flow of credit and truly making a One-Nation-One-Tax vision work. 

A collateral benefit, often overlooked, has been that the GST system has expedited the digitisation process by ensuring all returns were filed digitally across the country. The GST Network (GSTN) after initial teething issues has settled down remarkably.

GST’s success is also evident from the steady growth in revenue year on year. GST collections have nearly tripled in seven years, from Rs 7.19 lakh crore in 2017-18 to Rs 20.18 lakh crore in 2023-24.

Work In Progress

Notwithstanding the accomplishments, there still remains a lot of work to be done -- many a loophole to be plugged, anomalies fixed and rates rationalised further. Nothing exemplifies this more than the plethora of decisions and clarifications recommended by the GST Council in its last meeting held a week ago, on June 22.

There were recommendations on GST rates levied on milk cans to cartons and solar cookers and granting exemption to a range of goods and services. Also recommended, were measures to facilitate trade, including conditional waiver of interest and/or penalty relating to demands in cases where the tax has not been paid for reasons other than fraud. 

While typically delayed payment invites payment of tax with interest of 18 per cent, no such interest is to be demanded for demands raised during the period 2017-18 to 2019-20. While this may be administratively expedient, in effect it punishes the honest taxpayer who had paid his taxes on time and rewards defaulters.

The Council also recommended monetary limits for filing appeals by the Government as a measure to reduce litigation. This is a good move since it will reduce knee jerk decisions to file appeals and clog the system. 

However, the much-awaited GST Tribunal, so critical for easing the burden on the courts, has yet to be in place. It has been in the works for too long now. Rules have yet to be notified and members appointed. The Council ought to have taken cognizance of this lacunae and issued suitable directions. 

Other recommendations included a new section for granting power not to recover duties that have not been levied because of common trade practice. This was a much-needed provision, similar to the provisions in the Central Excise Act and a sunset clause for the much-debated anti-profiteering provisions. 

A common time limit for issue of demand notice irrespective of the nature of the case – fraud or otherwise – has also been suggested. 

We will wait for the actual notifications and  official clarifications as also the upcoming full Budget for FY 2024-25 to comprehend the import of all these recommendations.

Road Ahead

One of the main criticisms of the GST has been multiplicity of slab rates. There are five slabs, compared to a maximum or two or three rates in many countries that have successfully implemented GST.

A uniform rate will be a  dream as it will obviate the need for classification and make tax administration simple, but a look at the minutes of the second, third, fourth GST council meetings will reveal that the debates and discussions held over rates point to none seeing it feasible in near future.

While equity is the hallmark of a good tax, it should not be forgotten that an indirect tax is regressive. It makes no distinction between the prince and the pauper. So how then was equity to be achieved while finalising GST rates?

Nearly 50 per cent of the items in the consumer price index basket were kept at zero rate of tax and the rest at either 5 per cent or 12 per cent. Equity was thus never lost sight of. 

Successive GST Council meetings have kept reducing the items in the highest tax bracket of 28 per cent. As a result, most items now attract 18 per cent GST.

Economics is as much politics as it is economics, and to have a uniform rate, as late finance minister Arun Jaitley famously said in Parliament, for hawai chappals and refrigerators, is never going to be politically acceptable.

Reducing a slab will mean raising or reducing GST rates and the former will find political opposition, while latter will impact revenue. Thus ‘collapsing’ the slabs is going to be challenging and will not happen soon.

However, a recommendation in the latest GST council meeting for a uniform rate of 5 per cent Integrated Goods & Services Tax (IGST) on all imports of parts, components, testing equipment, tools & tool kits of aircraft irrespective of their classification to provide a fillip to MRO activities subject to conditions caught my eye.

This is interesting because, currently, the rates on these commodities range from 12 per cent to 18 per cent. The Council can identify more such groups of commodities and bunch them together and suggest a single rate. This can be done in a phased manner.

What the GST council should be seriously looking at is pruning exemptions. They are an aberration; they encourage lobbying and arbitrage, break the credit chain, distort GST and add to costs. GST's biggest selling point is that there is no tax on tax; that credit is available for all earlier stages of taxes paid on inputs. This gets defeated if exemptions are given. 

It would be desirable to broaden the GST base by bringing in petroleum products within its fold. Petroleum products are subject to Central Excise and VAT, which is again an aberration. Being subject to central excise or VAT, no credit is available on the taxes paid on petroleum products. This adds to costs. 

As per the Petroleum Planning and Analysis cell under the Ministry of Petroleum & Natural gas, the contribution of crude oil and petroleum products to the central government exchequer from central excise has risen from Rs 1,26,025 crore in 2014-15 to Rs.3,50.086 crore in 2023-24. The State governments' earnings from the same source rose from Rs 1,60,526 crore  in 2014-15 to Rs 3,18,523 crore in 2023-24. 

This is a lot of money, which neither the Centre nor the States will be willing to forego. What can be done, however, is that some petroleum products such as Natural Gas or Aviation Turbine Fuel can be brought into the GST fold, given their limited revenue implications.

Easy Picks For GST Council

Given that the GST is a dual tax administered system, the Centres and the states should ensure the law is administered uniformly. The decisions taken by some State Advance Ruling Authorities that create differences in classification and implementation between states should be avoided. The GST Council should step in to clarify and ensure uniformity. 

What the tax administrations should do is to focus on skill upgradation of staff across the country. This should be a continuous exercise. Posts should not remain vacant, as they are now – in large numbers – in both the central and state tax administrations. 

The Council should keenly look at the impact of GST on small and medium enterprises (MSMEs). There is a constant belief that this critical sector has been unfavorably dealt with.

Juxtaposing exemptions based on turnover/threshold but also getting them within the tax fold is always a delicate balancing exercise. Retrospective application of rates /clarifications should be strictly avoided. 

A case in point is the confusion caused by interpretation of levy on online gaming. The Council waited too long to step in, and clarified only in 2023 that the higher rate was always applicable from 2017. This after litigation across multiple courts where differing decisions were given. Now the Council has sought to address this issue of retrospective application in some cases.

A mountain of data has been collected by GSTN. Government should increase investments in data analytics and forensics that can strengthen the hands of tax administrators. Making such data publicly available, wouldfacilitate research by universities and think tanks and strengthen the GST regime with actionable insights.

A perennial area of concern is evasion, especially in credit being availed incorrectly or worse by creating fake documents. Tax administrations necessarily must come down heavily on such offenders, but ensure that conclusions are drawn strictly on the basis of hard evidence. A corollary to this is to ensure there is a process of speedy dispute resolution.

Despite all its challenges and shortcomings, GST is an unqualified success. The anniversary of this transformational tax reform is indeed a cause for celebration.

(Najib Shah is former chairman of the Central Board of Indirect Taxes and Customs. Views expresed are personal)