Our GST has deficiencies but let us not jump to judgement
The regime may have had teething issues but it has now stabilized and will show results in time
It is blissful to be ignorant. Ignorance enables certitude. This is because the more we know, the less sure we become, and it would be difficult to deliver absolute judgements and be accepted as experts. Turning non-judgemental, however, could pose an existential threat to commentators. Take the case of the goods and services tax (GST) that was introduced in India in July 2017. It has been widely criticized as having failed to deliver the benefits that were expected of it. Integration of the Indian marketplace, creation of scale efficiencies and enhanced gross domestic product (GDP) growth were the expected outcomes. There is no systematic study yet of the first two, while GDP growth has slowed in the past few years.
Therefore, much criticism has been directed at the new tax regime and the Union government that promoted it. However, scrutiny reveals that multiple players are responsible for the state of affairs. For example, an article on print.in cites Haseeb Drabu, former finance minister of Jammu & Kashmir, as having stated that technology was the biggest letdown during the rollout. This was handled by a private-sector entity.
Similarly, other attributions made to the GST for the woes and ills of other players and sectors in the economy make for interesting reading. Take, for instance, the story on the revenues of local bodies going down after GST introduction. Headlines assert that the Fifteenth Finance Commission held GST responsible for dealing a big blow to municipal finances. Read the story and a very different picture emerges. State governments have not been playing their part in passing on revenues to local bodies. That is a very different problem and has been a persistent one. State governments have been quite delinquent in constituting finance commissions and thus formulating rules for the devolution of financial revenues to local bodies. The non-sharing of indirect tax revenues, since a few local taxes have been subsumed under GST, is yet another instance of this behaviour. Blaming the tax is mischievous.
Further, the shortfall (relative to expectations) in GST collections is now being blamed, in part, on lax supervision and oversight. That is no less amusing than blaming the GST for local governments not getting their share of GST collections from the state governments. The decision to rely on self-declarations and filings, rather than on oversight and supervision, was deliberate. It was meant to provide time for businesses to adapt to the new regime. It does not take much imagination to think of the opprobrium that the government would have received had it embarked on intrusive oversight from the very launch of the new tax regime. The important question to pose is if we are responsible enough as a country to be trusted with self-policing.
The Arvind Subramanian committee pegged the revenue-neutral GST rate at 15%. When the new tax was launched in July 2017, the rate was 14.4%, and over the next two years, it had come down to around 11.6%. The number of items taxed at the highest GST slab rate of 28% had come down from 226 in July 2017 to a mere 28, as of the 31st GST Council meeting held in December 2018. Further, several key categories of goods remain outside the GST’s purview. Thus, far from being a deterrent to economic activity, the GST had acted as a countercyclical fiscal policy tool. The GST Council deserves credit for it. Rather, the reduction in rates, exemptions granted to various businesses from having to pay the tax, the composition schemes made available to small businesses and weaker economic activity have contributed to slower growth in GST revenues. In fact, with respect to the overall tax incidence, the authorities confidently assert that not a single item carries an overall GST incidence that is higher than the taxes borne by that good before the GST regime came into force.
Where GST might have contributed to the country’s overall economic difficulties is in the services sector. The number of forms that service producers have to file has increased considerably. In part, this is because of the separate registrations needed in each state, as opposed to the single registration pre-GST. With the services sector being the Indian economy’s biggest, the increased complexity and difficulties faced by service providers might have overshadowed the efficiency gains that accrued to goods and logistics providers. This is a matter for the GST Council’s unfinished agenda.
The GST Council has decided that rates would be adjusted only once in a year. Second, forms and returns are being simplified. More can be done. Exemption limits for the filing of GST returns 9 and 9C could be raised further without any impact on revenue. However, it is safe to say that the new tax regime has stabilized, and attributing subdued economic activity to it would be more unwarranted than has been the case already. If anything, the doubling of businesses registered under GST to 12 million from around 6 million pre-GST augurs well both for economic efficiency gains and tax revenue growth.
Lastly, the relevant horizon for evaluating a profound tax regime shift cannot be too short.
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