GS-3 Indian Economy and issues relating to planning, mobilization of resources, growth, development; indigenization of technology and developing new technology.
Context: Hailed as the biggest tax reform, GST has completed 2 years of operation. It was launched on 1st July 2017 in a special session of Parliament.
Goods and Services Tax (GST) and its present structure
- GST is a destination-based indirect tax and is levied at the final consumption point.
- Under GST, a gamut of 17 indirect taxes like excise duty, VAT, service tax, luxury tax, etc are subsumed.
- Taxes NOT subsumed under GST: Basic Custom Duty, Anti-Dumping Duty, Central Excise on Petroleum Products, VAT on alcohol for human consumption, Stamp Duty, Property Tax (levied by local bodies), Professional Tax, etc.
- GST is currently levied on every product [except petroleum products, alcohol, real estate & electricity] in four slabs of 5, 12, 18 and 28%.
- Most of the daily use articles have zero GST as per the latest revision of the tax rates last year. In addition, a cess is levied on automobiles, luxury, and demerit and sin goods.
- From the Government’s perspective, it is easier to collect and reduces tax evasion, for the customer, it is easier to understand & will reduce the tax burden and for industry, it ensures that there is no cascading effect of the tax and there is harmonization of tax laws, procedures, and rates of tax.
Successes of GST
GST marks a fundamental resetting of the Indian economy. It redefines the way business is done (with increased formalization), expands the market for goods and services (replacing many small and fractured markets with a single common one) and totally overhauls the Indirect Tax regime (one nation one tax regime)
- Tax Compliance:
- In the pre-GST period, traders had to comply with the rules & regulations of various tax departments & laws. Now, tax compliance has been easier for traders with a single set of norms.
- GST has been successful in increasing compliance among small traders through Composition Scheme. At present, small dealers up to a turnover of Rs 1.5 cr can opt for composition scheme and pay only 1% tax, facing a lesser compliance burden.
- There is now a single online system from filings to returns that have made transactions more transparent.
- Self-policing mechanism of GST helps to check tax evasion and expand the tax net
- Seamless flow of input tax credit is possible only when all the suppliers of a business pay GST. So each business will make sure that its suppliers have paid the GST so that they can take an input tax credit.
- By putting the burden of paying the tax on the buyer (called reverse charge), in cases where the supplier does not pay GST, the Government is nudging all businesses to sign up for GST.
- Expansion of Revenue Base:
- GST has helped the Government to expand the revenue base by about 85% in the past two years from 65 lakhs to 1.2 crores.
- Revenue Collections and Buoyancy: The relative buoyancy of GST revenue compared to the pre-GST period is a result of two factors.
- the design of GST that integrated the entire value chain from raw material to retail for the purpose of indirect taxation.
- The tax incidence on services increasing from 14% pre-GST to 18% post-GST.
A buoyancy ratio of over 1 shows the progressiveness in the revenue growth and opens the prospect of the rising tax-to-GDP ratio in the future.
- Rationalization of taxes: o Currently, around 97.5% of articles are covered by 18% or lower GST slab, a significant reduction from tax rates under the VAT regime where the standard VAT rate was 14.5% and excise duty was 12.5% (topped by additional sales tax & cess in many cases).
- Re-engineering of the supply chain: GST has presented an opportunity to reduce physical supply chain costs (costs attributable to transportation, warehousing, inventory, etc.) A unified tax and seamless availability of credit have reduced the cost of procurement of raw material.
- Introduction of E-Way Bills: Introduction of E-Way bill marks a shift from departmental policing model to self-declaration model for the movement of goods o It would enable the hassle-free movement of goods by eliminating the requirement of a separate transit pass for each state. The government has introduced several changes in the e-way bill system including auto-calculation of distance based on PIN codes and blocking generation of multiple bills on one invoice to make the system more efficient.
- Use of technology: All the operations ranging from front-end services of registration, returns and payments to all taxpayers, as well as the backend IT modules for States that include processing of returns, audits, assessments, appeals, etc. have been digitalized
- Reduced the interface between a tax collector and taxpayer, thereby reducing the scope for corruption.
- High-quality quantifiable data on the formal-informal, state-specific production, state-wise distribution of exports, point of origin of goods/services, and other economic data will enable better policymaking and governance.
- Per capita gross state domestic product has a high correlation with exports. The use of GST data can significantly improve GDP estimation.
- Reinforces Cooperative Federalism: GST council has emerged as a successful example of cooperative federalism and its functioning has been free from political biases.
TRENDS IN GST
Year on year increase in GST collections:
- 2017-18 – Rs. 7.4 lakh crores (Total collection); 90,000 crore – Average monthly collection
- 2018-19 – Rs. 11.7 lakh crores (Total collection); 98,000 crore – Average monthly collection
- April 2019 – Rs. 1.13 lakh crores (Highest monthly collections)
- 2019-20 Target – Rs. 13.7 lakh crores (Total collection); Rs. 1.14 lakh crores – Average monthly collection
Components of GST
- Central GST (lowest)
- State GST;
- Inter-state GST (highest)
- GST Cess (lowest)
Reasons for the increase in GST:
- Increase in the tax base
- Higher compliance among business
- A decrease in tax rates – leads to higher consumption of goods & services which ultimately leads to higher tax collection.
- Enforcement action was taken by tax authorities
The government should set an ambitious target for 2019-20 with respect to:
- Simplification of GST
- Reduce the tax compliance burden
- Widen tax base
It can be seen from the above figures that GST constitutes about 21% of the total revenues of the government. it is similar to the percentage contribution by the corporate taxes. We can also observe that the tax to GDP ratio in India has consistently increased, as we can see from the graph titles “TRENDS IN TAX RECEIPTS” the tax to GDP Ratio at the beginning of the decade, 2011-12 was 10.2%. however, at the end of the year 2018-19, it increased to 11.9%. GST trends can also be used to detect progressive taxation trends in India because the Direct tax Ratio is 6.4% compared to 5.5% for indirect taxes
Challenges that still remain
- List of exclusions: Petroleum products (crude oil & natural gas), diesel, petrol, aviation turbine fuel, potable alcohol and real estate, which contribute 35-40% of indirect tax revenue, are still out of GST’s ambit.
- Complex GST Structure with multiple tax slabs:
- 4 different rates undermine the eventual goal of simplifying tax compliance & leads to foregoing of efficiency gains. It is incongruent with the globally acceptable practice of single GST.
- Administering multiple rates is challenging, such as the high cost of auditing the classification of products into exempt, high & low tax slabs across every stage of production, distribution & consumption and longstanding litigation in case of disputes.
- Digital infrastructure and data privacy:
- Implementation of GST required registration at a humungous scale for input based tax crediting and creating a common database of registered traders to be managed centrally. This has emerged as a major challenge to GST’s IT landscape. Until now, states maintained the database individually.
- Technical glitches e.g. Introduction of E-Way Bill was delayed due to frequent website crashes
- Anti-profiteering norms:
- Provisions in Central GST legislation require industry to reduce prices and pass on the net benefits arising from the implementation of the GST to end consumers to keep inflation under control. But, implementation of the regulations is facing several roadblocks.
- The power is given to taxmen to conduct ‘mock purchases’, visit premises, search and check invoices might lead to misuse
- GST taxable base must include petroleum products, especially aviation turbine fuel and natural gas, real estate, and electricity. The inclusion of real estate will clean up the land market and will lead to revenue gains on the direct tax side as well as more transactions will be reported.
- Although indirect taxes tend to be regressive in nature, a low standard or modal rate with a small list of exemptions is the ideal GST structure that the Government should try to achieve.
- World Bank study said that the Indian GST rate was 2nd highest among the 115 countries with a national value-added tax. It was also the most complicated, with five main tax rates, several exemptions, a cess and a special rate for gold.
- Revenue performance of the Composition Scheme needs to be improved by ensuring better compliance among small traders. The imposition of additional duty on Reverse Charge Mechanism to be paid by Composition Dealers could be an important anti-evasion measure.
- Single authority for sanctioning and processing GST refunds has been proposed to simplify the procedure for exporters. Under the proposed reform, a single tax office will assess, check and sanction refunds of both centre and state GST portions.
- Governments pushing reforms have to beat the political costs upfront and early, with the benefits evolving over the medium term.
- Although it is in its early days still, the GST started on a positive note and the benefits for all stakeholders are evident. It is now time for the Government to stabilize the system, remove uncertainty, facilitate compliance by easing processes and expand the tax base to make the GST a real success