GST @ Five | Elegant in promise, a work in progress in practice

Central excise duty, additional excise duty, duty levied under the Medicinal and Toiletries Preparation Act, service tax, countervailing duty, special additional duty of Customs, VAT, CST, entertainment tax, octroi, purchase tax, luxury tax, taxes on lottery, betting, gambling and cesses and surcharges.  Before June 30, 2017, India’s indirect tax structure was an untidy gobbledygook of these, and much more.

The Goods and Services Tax (GST) sought to precisely address this concern: by offering a single shot solution. It was argued that the GST, once adopted, will consolidate this web of levies into a single tax.

The GST rolled out in India in a grand midnight event on June 30, 2017, promising to turn India into a ‘one nation, one tax’ market.

One of the several reasons why the GST’s implementation had faced political hurdles is the fear that it could rob state governments of their fiscal powers, leaving them with very little fiscal elbow room to raise revenues. The big question, of course, was what if revenues for states fell short after the GST came into force?

This was addressed by a safety net of sorts, with the Centre promising to compensate states for any revenue shortfall, calculated on a 14 percent annual growth rate.

For a GST revenue base of Rs 100 in a year, a state is guaranteed an annual revenue of Rs 114. If it is unable to generate Rs 114 from its own share of GST revenue, the Centre promised to bridge the gap.

This safety net, however, came with a sunset clause. It would end five years after the GST came into force. For many states, the disproportionately high reliance on the Centre’s compensation to fill the GST revenue gap could pose serious fiscal risk in less than two months’ time.

According to a study by PRS Legislative Research, during 2018-21, most states have relied on compensation grants to achieve the guaranteed revenue. While in 2018-19, states were able to achieve 88 percent of the target on their own, and relied on compensation for only 12 per cent.

The revenue gap has only progressively increased with states, on an aggregate basis, depending on Centres’ GST compensation for 23 percent of their guaranteed revenue in 2019-20, and 36 percent in 2020-21.

This compensation tap was originally set to close on June 30, 20211. The GST council, headed by Union Finance Minister Nirmala Sitharaman, which meets two days ahead of this sunset date (on June 28-29), is expected to spend a considerable time to discuss the issue of compensation payout to states with Opposition-ruled states aggressively pushing for its continuation beyond June 30, 2022.

Another lingering pain point is, of course, the multiple slabs. Multiple slabs go against the conceptual construct of a uniform, unified, nation-wide tax system.

While multiple tax slabs continue to run against the GST’s definitional idea, it is the interpretation of rules by taxmen that have not only flummoxed many, but also raised major questions whether too much has been left open for unpredictability, and the inconsistencies to emerge as major irritants to small and medium businesses.

On March 10, the Haryana Appellate Authority for Advanced Ruling (AAAR), ruled in favour of levying a higher GST on pizza toppings, stating that a pizza topping isn’t pizza, its preparation method is different, and should, therefore, be categorised differently.

This is a classic example that, effectively, shows that there are three different tax slabs not only for various parts of the pizza, but where it is made, bought, or eaten. A pizza made, bought, and eaten in a restaurant attracts 5 percent GST. However, if the pizza is delivered at home, it is considered a service, and attracts 18 percent GST. It gets even more complicated when the pizza is made at home. A pizza base will attract a 12 percent GST, 18 percent GST on the topping, and 12 percent on the rest of the ingredients such as sausages, etc.

There are also reports that bakeries and other outlets that serve food such as momos have come under the taxman's lens for availing lower GST rates applicable to a restaurant. The tax department has demanded 18 percent GST, instead of 5 percent, from several bakeries and outlets. The interpretation is that these are not ‘restaurants’ as food is prepared somewhere else, and only heated up at these places before they are served to customers.

Five years later, two big questions remain: By when can states generate enough revenues from the GST to be not dependent on the Centre for compensation; and, by when will India move away from a multiple slab to a single, or a two slab GST structure?