GST @ Five | GST has heralded India’s economic integration

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The introduction of the Goods and Services Tax (GST) was the biggest tax reform in post-Independence India. It was the culmination of the decades of evolution of indirect taxation in search of a simplified and efficient taxation system.

The GST was given an in-principal go-ahead in 1999 itself. The idea had the support of the major national parties across the ideological divide, as deficiencies in the existing Value Added Tax (VAT) system were well known. In 2005, the Kelkar task force on Fiscal Responsibility and Budget Management (FRBM) recommended replacing all indirect taxes except the customs duty with VAT on all goods and services with complete set off in all stages of making a product.

The budget of 2006-07 announced that the GST would be introduced with effect from April 1, 2010. But the pace was slow due to the lack of political commitment by the Congress-led United Progressive Alliance government. The first discussion paper was out only in 2009, and the 115th constitutional amendment was introduced in 2011 to bring about the GST, but it reached a deadlock due to disagreements between the Centre and the states.

Consequently, it was only in 2016 that the Bharatiya Janata Party (BJP)-led government could negotiate the GST framework, and an amendment Bill was passed. Subsequently, the GST bills were passed and enacted in July 2017.

As the GST regime completes five years of implementation, it is a good time to review its performance, and the challenges ahead.

The GST did simplify the indirect tax regime to a great extent when compared to the old, fragmented system. It subsumed dozens of cess and taxes like central excise duty and excise duty levied under medicinal and toiletries preparation Act, central VAT, state VAT, entertainment tax, luxury tax, entry tax, taxes on lottery, betting and gambling, taxes on advertisement, surcharges, etc.

It drastically reduced the compliance costs and complications. The GST created the long-awaited common market and heralded India’s economic integration. It reduced the overall burden of taxes on the consumer by largely removing cascading effect, zero-rating for basic consumer items, and inducing greater efficiency.

The GST has increased transparency, compliance, and overall collection, reflected in the record tax collection in recent months. The revenue collection is now more than Rs 1 lakh-crore, month after month, and is expected to rise further as the post-pandemic economic recovery gathers steam.

It must be understood that no system overhaul can be enacted perfectly in a single stroke. The government rightfully rejected the utopian 'perfect plan' approach, and instead opted for quick and frequent upgrades based on the feedback loop, especially regarding the GST Network (GSTN). While it created some disorientation initially, the system became much more stabilised, simplified, and comprehensible to the taxpayers.

Negotiating the GST and arriving at a consensus by harmonising competing claims and differing opinions and decision-making mechanism via the GST council itself is an achievement of co-operative federalism, which has introduced innovation in how India deals with economic, administrative, and political issues.

There was a debate about origin-based vs destination-based taxation, with more industrialised states expressing concerns over the loss of revenues. There were concerns regarding the revenue shortfall due to ceding tax autonomy over all items except items like petroleum products, alcohol etc.

Much of the issues pointed out by the critics originate from the necessity to make concessions to allay the fears of different states, and bring them on board by agreeing to constructs like revenue-neutral rate. It is a rate of tax that allows the government to receive the same amount of money despite changes in the tax laws.

The idea that the government must ensure that tax collections pre-GST and post-GST are the same, including the 'expected annual growth', was always opaque and difficult to implement in practice.

But it was a necessary concession, but introduced numerous tax slabs to ensure higher taxes on certain items to generate enough revenues. It hampered the economic restructuring to account for a new economic reality and thus prevented wider economic efficiency gains and dissuaded states from working towards more efficient taxation and administrative system.

Indeed, there are still technical issues plaguing the GSTN system, and it could be much simpler, faster, and more efficient, but the GSTN is also a technological achievement. The digitisation of the taxation system, along with e-way bills and e-invoicing, has eliminated fake invoicing and tax evasion to a great extent.

There are no examples of any country successfully implementing such a complex digital transformation of its tax system, especially when a large informal sector exists outside the taxation net. Several technical, legal, administrative, and political issues are still to be resolved, like compensation to the states or inverted duty structure, tax slabs and tax rates.

But it must be realised that the GST is a permanent negotiation between the Centre and states, and it will have to keep responding to emerging issues due to changing contexts. What is needed is to ensure flexibility and avoid too much bureaucratic tinkering and judicial interference.