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What next for GST?

Land and real estate can be brought into the GST net, even as stamp duty is retained so as not to affect the states’ revenues.

The next surge in revenues would critically depend on the rationalisation of GST rates so that the revenue neutral rate of 14.8 % prevalent pre-GST is restored.

By VS Krishnan

The GST journey is now five years old. During this period, revenue growth has gone up and down, creating misgivings about the efficacy of the tax reform. A more detailed analysis shows that the buoyancy of revenue in the first year was 1.12, but tapered off later on due to the combination of factors like rate reduction, technical glitches in the GSTN system, and Covid-19’s impact on the economy.

However, the latest revenue trends give room for optimism. The GST revenue as a proportion of the GSDP rose from 5.8% in FY21 to 6.4 % in FY22. This ratio would have been 7.4% if we had to factor in the 3-percentage-point reduction in the incidence of GST, which would translate into a 1-percentage-point drop in the GST-GSDP ratio, according to a recent article on the subject by Arvind Subramanian and Josh Felman.

The fact that we are seeing a surge in GST revenues despite a drop in the incidence of GST duties demonstrates the effectiveness of the compliance measures taken by the government, such as allowing input credit only on tax invoices uploaded to the system by the supplier, the introduction of the system of e-invoice for those with the annual turnover above `2 million, and introduction of e-waybill for the transporters.

Further, data sharing between the two tax departments—CBIC and CBDT—has contributed to better coordination in the enforcement efforts.

The next surge in revenues would critically depend on the rationalisation of GST rates so that the revenue neutral rate of 14.8 % prevalent pre-GST is restored. This would require a 3-percentage-point incidence increase from the present level of 11.8%.

The Bommai Committee report is therefore important in carrying out the rationalisation exercise, which must be done in a manner that minimises inflationary pressures. This would perhaps require bringing down the standard GST rate from the present level of 18% to 16%, but this drop has to be compensated by phasing away exemptions, raising the merit rate of 5% and merging the 12% rate with the standard rate.

The time has also come to look at widening the GST base, as suggested by the Kelkar committee. As far as inclusion of petroleum is concerned, with oil prices ruling high, this may not be the appropriate time to bring petrol and diesel under the GST net. In the first round, we could bring natural gas and aviation turbine fuel (ATF) into the GST base. The natural gas is mainly an intermediate input while bringing ATF and levying the standard rate will help the aviation industry, which is still reeling under the impact of the Covid crisis.

Land and real estate could be brought into the GST without abolishing stamp duty as state revenues would be affected. This could be done without any amendment of the Constitution by treating the right to use land and supply of real estate for commercial/residential use as Deemed Service. This may not yield additional GST revenue because the output revenue would be offset by input credit on cement and steel. However, the measure will bring greater transparency in the land market and perhaps generate some revenues on the direct tax side. This could be one more arrow in the government’s armoury to battle the black money menace. Finally, bringing in electricity into the GST will confer many benefits, including evaluating the true level of tax subsidies on various forms of input energies used in the generation of electricity-coal, gas and other renewables.

In carrying the GST reform forward, it is important that states are consulted and a broad consensus is generated. Refreshingly in the past, all decisions except one were taken unanimously in the GST Council. In order to generate greater confidence in the Council, the states must be administratively empowered.

As suggested by Subramanian in the recent article, the GST Council sessions may be chaired by the Union finance minister and one of the state finance ministers selected by rotation. The GST secretariat would administratively service both Union and state finance ministers chairing the session. Further, federal institutions like the inter-state council need to be revived and must meet more often to discuss national issues.

In conclusion, the GST reforms must be successfully completed; cooperative federalism will need to prevail, and both the Centre and the states will have to play their part.

The writer is retired member, Central Board of Indirect Taxes & Customs | Views are personal.

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