One year on, GST is still work in progress

Amilestone in India’s reform journey, it took 17 years for the Goods and Services Tax (GST) to move from an idea to reality. Now one year after the landmark tax reform was rolled out, it is still a work-in-progress and a hotly debated subject with its share of criticism and admiration. Since its introduction on July 1, 2017, GST has struggled to live up to its expectations. Marketed as ‘one nation one tax’, GST, in its current form, is anything but a good simple tax that the country was waiting for long.

In the last one year, GST has not only exacted a heavy toll on small and medium businesses and exporters, it is yet to deliver on its biggest promise of formalising the economy by making tax evasion difficult. It has also failed to bring down the demand for cash, which has now crossed the predemonetisation levels. Global financial institutions and research firms like the World Bank and HSBC, which had earlier given it a thumbs-up, have been forced to take a hard look at it, as the rate of compliance for nine months of FY 2017-18 stood at around 65 per cent.

However, despite the initial glitches and pain, the experience has been comforting. The early-day jitters have given way to general acceptance that GST in its current form may not be the perfect single tax system, but it’s working in many ways though several issues still remain to be addressed. The complicatedness of the system comes out from the fact that nearly one-third of those who need to file GST returns did not do so in the last financial year. The original criticism and oft-repeated concerns over its complicated tax structure with multiple tax rates remains unaddressed. Too many tax rates mar the simplicity of a standardised single tax that GST ought to have been.

The complicatedness of the system can also be made out from the fact that since its implementation, the GST council has put out 158 notifications. Several U-turns and tweaks in tax rates across products have not sorted out the complex issues so far. In terms of revenue, the government has collected 7.41 lakh crore under GST in the last financial year. This works out to a monthly average of 89,885 crore. With compliance beginning to improve and tax revenue stabilising, the government has set a much higher target of 13 lakh crore in revenue for the current fiscal, assuming a 20 per cent rise in monthly collections. However, to achieve this, there are many challenges, including simplification of the system and widening of tax base.

In theory, GST is an excellent tax reform — it subsumed 17 taxes and 23 cesses. But in reality, it’s a compromised reform, thanks to the compulsions of fiscal federalism that required obtaining a broad consensus among all the states and the Centre. Certainly, the earlier tax system was far more complicated which reduced efficiency and pushed up prices of goods and services. However, when the new system was designed from the scratch, it needed to be more efficient, tax-friendly and comprehensible. But GST, in its current form, is not only user-unfriendly but does not help the ease of doing business. It is one reason why the hubbub and debate around GST has still not ebbed.

A ‘good and simple tax’ is how the GST was described at the time of its launch. It was expected to check inflation, make tax avoidance difficult, increase revenue and benefit the GDP. So, has GST delivered on these promised benefits? Going by the example of many countries that launched the single tax regime, it was widely feared that GST would cause inflation to rise in India as well. This didn’t happen because of the multi-slab tax structure which ensured that the tax rate was as close to the earlier rate. However, did it check inflation? While prices of essentials did come down, services became expensive. But it didn’t cause inflation to rise because of the relatively lower weight of services in the consumer price index (CPI).

Has the tax compliance increased? Tax avoidance has certainly become difficult. The government is expecting the compliance levels to improve when the e-way bill system stabilises and invoice matching starts from September. GST was expected to add around 2 per cent to GDP. Has it added significantly to GDP number? Not yet. Sequentially, growth picked up in the last quarter of fiscal 201718, but dropped to 6.7 per cent for the whole fiscal as compared to 7.1 per cent in 2016-17. For the current fiscal, it is expected to touch 7.4 per cent. However, it is debatable whether the increase in growth can largely be attributed to GST.

Is GST one of the most complicated systems in the world? It is. Including the tax on gold and precious stones, India has six non-zero rates. Over and above this, there is a special cess on luxury and sin goods. According to a World Bank report of March 2018, in a sample of 115 countries, four countries, other than India, have four or more GST rates. The four countries are: Italy, Luxembourg, Pakistan and Ghana. Of the 115 countries, 49 countries have a single rate, while 28 use two rates. India is the only country with six rates. So, not only there are too many rates, which make the system quite complex, but some rates are also too high.

In spite of significant success in its first year of implementation, there is still a long way to go in making GST a truly good and simple tax. Apart from addressing glitches and issues in the operational domain, experts are of the view that significant intervention is needed to bring GST to its full efficiency. This includes bringing down the tax slabs from six to three. Currently, nearly half the economy is out of the ambit of GST. Speedy inclusion of petroleum products, electricity, real estate and alcohol will widen the tax base and help bring down the slabs and lower tax rates. One year is too short a period to estimate the true impact of GST. It will continue to evolve as procedures and rates are modified and its full potential will be realised over a longer period of time.

The author is an independent senior journalist.