In the place of a complex system that included multiple taxes at the Central, state and local levels, there is now a comprehensive tax subsuming most of the important indirect taxes.
As the Goods and services tax (GST) completed two years on Monday, it has barely become the good and simple tax that it was meant to be, but has nevertheless proved to be a system significantly superior than what it replaced.
In the place of a complex system that included multiple taxes at the Central, state and local levels, there is now a comprehensive tax subsuming most of the important indirect taxes. Also, the tax cascades have been reduced with a more seamless system for businesses to reduce their tax liability by claiming credits for input taxes.
The GST did reduce the tax rates and lead to an expansion of the tax base. To a lesser degree, it improved the tax buoyancy as well (in the very first year of GST, the revenue buoyancy was a progressive 1.2). Though revenue collections haven’t kept pace with the ambitious targets, the rate of growth was higher than states’ own tax revenue witnessed prior to GST.
The lower-than-anticipated growth in GST collections is attributable to the massive rate reductions over the last two years and the failure of the government to put in place a robust system to check evasion via matching of invoices.
Huge amounts claimed by businesses as transitional credit (for the taxes paid in the pre-GST regime) over the last two years also have had a dampening effect on collections, especially the Central GST.
GST’s teething troubles persisted for quite a while and this dealt a blow to small businesses but the hiking of the entry threshold to Rs 40 lakh turnover and the easy composition scheme has helped address such concerns to an extent.
Going forward, GST needs to be more inclusive — auto fuels and real estate are the two major segments that require to be brought under the tax for it to be more comprehensive and yield the desired level of economic efficiency gains.
With the revenue collections growing somewhat steadily, the need for compensating states for any revenue shortfall from an assured 14% growth would likely diminish. As former finance minister Arun Jaitley wrote in a blog on Monday, “Already after the second year, twenty States are independently showing more than a 14% increase in their revenues and the compensation fund in their case is not necessary.”
There is undoubtedly a need to further simplify the GST structure. The number of rates must come down. Wile there is clamour for a single rate of GST from several quarters, including the Congress party, this is easier said than done. Jaitley added: “It would be inequitable to apply a single rate in countries where there are a large number of people below the poverty line… An indirect tax is a regressive tax. (However) as revenue increases further, it will give an opportunity to policy makers to possibly merge the 12% and 18% slab into one rate, thus effectively making the GST a two-rate tax.”
Minister of state for finance, Anurag Singh Thakur, on Monday cautioned the industry leaders against use of fake invoices and said that it was bringing bad name to GST. Speaking at an event to mark two years since the roll-out of GST, Thakur urged the leaders of industry to take corrective steps and added that while the government had no enmity with honest taxpayers, it won’t spare those engaged in circulation of fake invoices.