What four years of GST taught us about this tax system
When the Goods and Services Tax (GST) was introduced on July 1, 2017, it was a feat. There had been a lot of political wrangling and getting them off the ground was a difficult task. The idea was for India to adopt this new tax regime and refine it along the way. Four years later, what does it look like?
When the GST discussions took place, there were two divergent views. The establishment-backed view spoke of how gross domestic product (GDP) growth would increase by 1 to 2 percentage points, inflation would fall, and government revenues would rise. However, it seldom happens that everyone is better off and no one is worse off. At the other end of the spectrum, skeptics argued that a five-rate GST system was hardly a valid scheme. In addition, micro, small and medium-sized enterprises (MSMEs) would face serious problems with taxes, refunds, compensation and fines. Therefore, it hardly made sense. There was political rumor about the deficit compensation portion for states, and there was assurance that payments would be made from the cessation buffer created for this purpose in the event that state revenues failed. would not increase by 14% per year.
Let’s see how things have evolved. Two adjustments made by the government were the introduction of a “membership plan” for MSMEs and the modification of GST rates for various products after performances. Pointing ₹$ 1,000 billion in GST revenue every month has become the basic rule of its success. Since the GST is a consumption tax, the economy has to keep running and people have to spend to make it work.
The turn of the story began in 2017-18, when GDP growth slowed. From 8.3% in 2016-17, it fell to 4% in 2019-20 before turning negative in 2020-21 with a production contraction of 8%. As a result, India’s GST collection base has shrunk in relative terms, creating an enigma. As a share of GDP, GST collections were 6.9% in 2018-19, then 6.6% in 2019-2020 and 5.8% in 2020-2021. Obviously, that part of the story didn’t work.
The biggest challenge for the GST system is compensation for states. This is something states would like to revisit, as the 14% growth-driven compensation was supposed to last for five years, and with only one year remaining, appears to be on slippery ground. Due to lockdowns in 2020 and again in 2021, people haven’t been able to spend much. It affected revenue. When the GST compensation was initially discussed, it was not intended that all states should be paid for deficits at the same time. We remember that neither the States nor the Center wanted to borrow to fill this shortfall in FY21, and finally the latter had to give in and go to the market. This issue needs to be resolved, as such a situation could reoccur and the provision may need to be extended for five years.
The second challenge concerns exclusions. The government had excluded fuel and “products of sin” from the scope of the GST in order to retain control of this lever to increase tariffs and generate revenue. This needs to change, as an unintended consequence has been higher inflation, as evidenced today. It is utter nonsense that on the retail price of gasoline ₹100-105 per liter, a little more ₹60 goes as taxes. The problem is that its price is influenced by the world price of crude oil, which is currently testing $ 75 a barrel. Add to that taxes in the form of excise ( ₹33 per liter) and value added tax (30% in Delhi), and the consumer faces high pump prices. The closures mean lower fuel consumption and lower government revenues. The solution was to increase these taxes in order to protect income. Excise collections after the GST were reduced to ₹2.3 trillion, but rose to ₹3.7 trillion in 2020-2021.
The side effects of rising fuel costs are felt on the transportation route, as the prices of all commodities increase once transportation costs are factored in. Gasoline and diesel have a combined weight of 2.3% in the consumer price index. It may seem small. But the ripple effect is important because it drives up the prices of food grains and manufactured goods. That is why retail price inflation has been higher than it should be and the role of non-GST fuel is very important.
The third challenge is to meet our need to apply a single rate to all goods. Otherwise, the GST is similar to the previous complex regime, except that it includes government taxes. The past four years have given us an understanding of how goods should be taxed and the revenues that will flow to government. There is now a pressing need to reduce multiple rates in a single slab.
Our four-year experience also debunked some tax myths. GDP growth only increases if more income is spent, which is best accomplished by creating more jobs. The GST itself cannot increase GDP, although it may statistically include the unorganized sector to some extent, and should not be confused with a growth stimulator. Second, with deep contradictions in our tax structure, inflation will remain beyond the reach of the GST. Third, for government revenues to grow, the economy needs dynamism. In our current low growth syndrome, we cannot expect miracles. These are the revealed facts of the GST.
Madan Sabnavis is Chief Economist, CARE Ratings, and author of “Hits & Misses: The Indian Banking Story”. These are the personal opinions of the author.
Never miss a story! Stay connected and informed with Mint. Download our app now !!