CONTEXT

• The 43rd meeting of the Goods and Services Tax (GST) Council is to be held this month.
• It is to be noted that the GST Council is mandated to meet at least once every quarter, but it had not met for the last two quarters, due to the pandemic.
• However, representatives of 31 States and Union Territories are expected to attend the upcoming meet.

PROBLEMS UNDERPINNING GST

• GST was postulated as the panacea for India’s throttled economy to deliver:
  •  enormous economic efficiency gains, 
  • improve tax buoyancy and collections, 
  • boost GDP growth 
  • usher in greater formalisation of the economy.
• But even after three years of its launch and even before COVID-19, GST had failed on all those promises.
• The 15th Finance Commission report formally acknowledges that GST has been an economic failure that did not deliver on its early promises.
• This failure of GST can be attributed to the initial problems like:
  • the multiple rates structure,
  • high tax slabs
  • the complexity of tax filings
• But now, GST has a more fundamental problem, i.e. the erosion of ‘trust’ and ‘trustworthiness’ between the States and the Centre.
• States are dependent on GST collections for nearly half of their tax revenues.
• The States paid a huge price for GST in terms of loss of fiscal autonomy. They are dependent on GST collections for nearly half of their tax revenues.
• The promised economic gains are invisible, and India’s federalism has been ruptured.

HOW GST HAVE ENDURED SO FAR?

• GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year.
• This has minimised their risks of the new experiment and compensated for their loss of fiscal sovereignty.
• But this revenue guarantee ends in July 2022, and can lead to a crumbling of the precarious complex on which GST stands today.

CONCLUSION

• • India’s GST system was to be based on the spirit of cooperative federalism which would yield significant economic benefits to all the stakeholders, but the promised economic gains remain largely unfulfilled.
  • While technical fixes such as simplification of GST rates and tax filing systems could be addressed easily, the more fundamental challenges like the lack of guaranteed revenues and incentives for States to continue in a GST regime and the growing mistrust between the states and the centre are deepening.

• The end of India’s grand GST experiment seems inevitable unless there is a radical shift in India’s federal politics, backed by an extension of revenue guarantee for the States for another five years.

Reference:

1. https://www.thehindu.com/opinion/op-ed/the-end-of-the-road-for-indias-gst/article34652438.ece