About Goods and Services Tax (GST)
- Goods and Services Tax, an institutional tax innovation intensively marketed in many countries by the International Monetary Fund and the World Bank.
- Goods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the supply of goods and services.
- It is a comprehensive, multistage, destination-based tax:
- Comprehensive because it has subsumed almost all the indirect taxes except a few state taxes.
- Multi-staged as it is, the GST is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer and
- Destination-based tax, it is collected from point of consumption and not point of origin like previous taxes.
- The tax came into effect from 1 July 2017 through the implementation of the One Hundred and First Amendment of the Constitution of India by the Indian government.
- The GST replaced existing multiple taxes levied by the central and state governments.
- The tax rates, rules and regulations are governed by the GST Council.
- Tax structure:
- CGST levied by the Centre
- SGST by the States
- UTGST by the Union Territories and
- IGST levied on inter-State supply including imports.
- Applicability: GST is applicable to all goods and services except alcohol for human consumption and five specified petroleum products with a common threshold exemption applicable to both CGST and SGST.
- GST Architecture: India’s GST architecture is built on the firm foundations of a GST Council and the GST Network (GSTN).
- GST Council: The GST Council is the key decision-making body, chaired by the Union Finance Minister with a Minister of State in charge of Finance and the Finance Ministers of States as members. This is envisaged as a federal process to protect the interests of the States.
- GST Network: GSTN generates high frequency data and subjects them to analytics for informed policy making.
- Built on this foundation, India’s GST paradigm stands on two key pillars: revenue neutrality and GST compensation for the States.
Significance of GST
- Expected to improve tax-GDP ratio
- End tax cascading
- Enhance efficiency, competitiveness, growth, and ensure lower prices.
- It was also projected as a watershed in India’s fiscal federalism.
- While the States have forgone a substantial part of their own tax revenue, they were in turn guaranteed a GST compensation assuring 14% growth in their GST revenue during the initial five years.
- Many exemptions, along with different tax rates, as against the single rate in many countries, have been accommodated to protect the interests of different stakeholders.
Assured revenue neutrality remains a mirage
- Many States have experienced a declining tax-GDP ratio.
- While the share of the Centre in total GST increased by 6%, that of States put together lagged behind with only a 4.5% increase.
- Stark differences between the Revenue Neutral Rates (RNR) for the producing States and consumption State have been observed.
- Exemptions and subventions complicated and worsened the situation.
- The South African experience illustrates how zero rating and large exemptions have defeated revenue goals.
Against cooperative federalism
- GST in India was possible only because the States surrendered much of their constitutionally inherited indirect taxes.
- Although the States collectively forewent 51.8% of their total tax revenue compared to the Centre that surrendered only 28.8%, yet GST is shared equally between the Centre and States.
- Many of the States are dependent on GST compensation because of revenue neutrality failure and even the constitutionally guaranteed compensation for five years has not been implemented in letter and spirit, forcing the States to beg for their entitlement which is not conducive to sustainable cooperative federalism.
GSTN- data monopoly
- GSTN neither makes effective use of the massive and invaluable data being generated nor shares them to enable others to make use of them.
- Such practice in “data monopoly” was a fact of history in India’s statistical system.
No one benefits
- Neither the States nor the consumers seem to have benefited since the rate reductions are not translated into prices due to profiteering and cascading.
- The Canadian experience with GST shows that GST could be improved by limiting zero rating, tax-exemptions and harmonising tax rates.
- The Brazilian experience indicates that transfers through social security or subsidies tend to be more progressive than subventions or exemptions because reduced rates or zero rating do not usually get passed on to target groups or industries as happening in India.
- The Malaysian experience demonstrates the need for swift and transparent functioning of the input tax credit system through a flawless IT infrastructure. and has to go sooner rather than later.
- GST should be seen purely from a revenue point of view and as a fiscal policy tool for efficiency, competitiveness and growth.
- GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve cooperative federalism and also lead to enhanced economic growth.
- It is the duty of the centre to address the unresolved issues surrounding GST to make it wholesome.