Value added in goods and services is one of the three basic tax-bases; income and wealth being the other two. When goods and services are produced and sold, economic value is created. Governments understandably tap value in goods and services for raising tax revenues.
With value embedded in products being most perceptible at point of sale, it is no wonder that goods taxation commenced with taxation of final products. However, industrial products, which make up most of indirect tax revenues, are produced in multiple stages.
Manufacture and sales at intermediate stages leads to multiple stage taxation. Such cascading value taxation make different products suffer inequitable taxation as a proportion of the value of their final products.
This was the big problem in the pre-Goods and Services Tax (GST) era. There was another big problem as well.
Monstrous Indirect Taxation
Every taxation authority — central, states, and municipalities — wanted a pie of product taxation. The founding fathers split product taxation authority among the three levels.
A single industrial product suffered excise duty on manufacture levied by central government, sales tax on sale levied by state governments, and octroi duty on entry by municipalities. This led to three different taxes, and three different assessments of one product.
There was yet one more big issue.
India at Independence did not recognise services as value creative. Therefore, no general taxation of services was there in the Constitution. In the 1990s, the Union government interpreted residuary entry 97 in the Union List to begin taxation of services.
This cascading, fragmented, and moth-eaten indirect/value taxation system was a monster which bedevilled businesses, governments, and households. Tax avoidance was rampant, and the nation earned much less revenue as a proportion of its GDP.
GST Transformed Value Taxation System
Goods and services produced are finally consumed, or get embedded in assets.
Realising that taxation of value added at different stages of final products and services is a more equitable, efficient, and a fairer method, India embarked on a long journey which finally culminated in the GST on July 1, 2017.
The introduction of modified value added (MODVAT) in the 1980s in excise duties and the transformation of states’ sales taxes into value added taxes (VAT) in 2005-06 marked two most important stops in this journey.
India’s GST system, in last five years, has seamlessly integrated value added taxation of not only goods and services produced and consumed intra-state, but also produced in one state and consumed in another (inter-state), and those imported into the country.
India’s GST design is quite robust, based on ultimately capturing every invoice evidencing production, transportation, and sales of goods produced with producers/sellers paying GST effectively only on value added, not on output value.
There have been some hiccups which are quite understandable. As GST completes five years, India’s GST system has quite stabilised.
Three cheers to all concerned for transforming India’s complex and unproductive product taxation system into a highly digitalised, integrated, and functional GST system.
A Work In Progress
The GST, though, is a work in progress.
Tax revenues from petroleum products are about 40 percent of the GST revenues. States receive about 25 percent of their SGST revenues from excise duties on alcoholic products. These products are still outside the GST. Electricity is outside the GST. Approximately, 50 percent of value added tax revenues are still outside the GST system.
These products need to be brought within the GST ambit.
While it was a massive improvement over the anarchic rate structures, there are still too many GST rates which defy economic logic. There are eight effective rates of the GST.
What is the rationale for taxing cement at 28 percent, steel at 18 percent, and granite blocks at 12 percent — all construction materials? What justifies zero percent GST on bread, 5 percent on roti, and 12 percent of branded namkeen — all food products?
Taxing unprocessed agriculture and primary products at 8 percent, all consumable industrial products and services at 16 percent, and durable industrial products at 24 percent might be one such solution.
Sin goods and some ultra-luxuries can have additional excise duties. Asset taxation, including gold and real estate, can be shifted to a new reformed system of wealth taxation.
The GST, in terms of administration, is still highly fragmented.
The GST assessees who sell their wares in more than one state, have to get registered, and file separate state-wise returns. Small enterprises who sell digitally are discriminated against those selling physically in terms of minimum turnover exemption threshold and availing of composite taxation scheme.
These irritants and discriminations need to go.
GST Reforms
There is unnecessary chest thumping at getting more than Rs 1 lakh-crore in GST revenues. The current performance is essentially a result of inflation and imports. Despite high nominal receipts, as a proportion of the GDP, the GST revenues are still less than pre-GST times (excluding compensation cess).
Trust between the Centre and states has broken. The GST Council has become an argumentative forum. If the governments focus on completing the remaining GST reforms, households, businesses, and government will lastingly benefit.
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