To improve efficiency of GST, it needs to be simplified further
Both the different types of GST as well as the tax slabs need to be compressed into a more compact system
The latest controversy over new Goods and Services Tax (GST) rates being levied on a wide range of commonly consumed foodstuffs has had opposition parties up in arms. It is difficult, however, to understand the reasons for the objections as State governments are normally involved in any GST rate changes. The public perception may be that taxation rests in the hands of the central government.
This is definitely true in the case of direct taxes. But in regard to GST, there is an over-arching council that takes decisions by consensus. The council includes representatives of State governments as well as the centre and meets periodically to take decisions on all GST matters.
In this particular case, it seems that food articles including wheat, rice, pulses, and curd were earlier being taxed at 5 per cent under the term branded items. A group of ministers then sought to plug revenue leakages by taxing even unbranded but pre-packaged food items at the same rate. The GOM also comprised members from West Bengal, Rajasthan and Kerala. Ultimately, based on its recommendations, the GST Council approved the rate changes at its meeting on June 28 and 29.
The fact is, State governments rarely decline any proposals made to hike tax rates, given their anxiety to increase revenue inflows from GST collections. In this instance, the West Bengal government has maintained that it did raise an objection to the altered terminology for the levy. Even so, it appears that the Council which gives one –third weightage to the central government and two-thirds to States in terms of voting, ultimately approved the levy.
The question then remains, who was responsible for changing the terminology from 'branded' to 'pre-packaged' and thus widening the scope of the tax. Clearly, both centre and States need to do some rethinking on this issue instead of blindly going ahead to raise rates in the pursuit of higher revenues.
The controversy has come shortly after GST reached its five year milestone. For States, this brings to an end the period fixed for providing compensation to States for revenue foregone due to loss of their own State levies. A decision on the issue could not be reached at the last meeting so it has been pushed to August. But there is no doubt that with Covid having brought economic hardship and lower revenues for over two years, States have a legitimate case for seeking compensation for another five years. It is clear this is a crutch that may be needed to help balance State finances in the medium term.
As for the future of GST now that it has been in existence for five years, it seems clear that efforts should be made to streamline the tax and make it more in line with the original concept of a single point levy. Its present avatar is that of a multi-layered tax with several rate slabs.
There are currently four types of GST – integrated GST which is imposed on inter-state supplies of goods and services, and then there is central, state, and union territory GST, imposed on intra-state supplies. In addition, there are four tax slabs ranging from five to 28 per cent. Both the different types of GST as well as the tax slabs need to be compressed into a more compact system, ensuring that the average is revenue-neutral. In other words, there should be no loss of revenues compared to the pre-GST era.
It must be conceded that even though GST ended up being far more complex than it was originally intended to be, it has had a fair share of success. It has managed to ease the process of inter-state transport and eliminated the long octroi queues at state borders. At one stage there was concern over stagnation in monthly revenue collections but after the pandemic there has been a consistent rise. This is being attributed partly to the economic revival and partly to efforts to reduce gaming of the system.
Another reform needed for the GST framework is to bring in the two highest revenue-garnering items into its fold, that is, petroleum and alcohol. Both had earlier been excluded as central and State governments felt the revenue loss on this account would be a blow to their exchequers. But now it is time to bring these into the fold of the single tax system. Bringing alcohol can be deferred a while longer but crude oil and petroleum products definitely need to be brought within its ambit. Currently input tax credit is not available when these are used as an economic activity. Besides, the centre is using its powers to levy a cess on both domestic crude output and exports of diesel and jet fuel. Since revenues from a cess go directly into the centre's coffers, the States have a justifiable grievance that they are being excluded from badly-needed revenue inflows.
It would thus be in the fitness of things for petroleum to be brought under the auspices of GST and ensure a more equitable distribution of revenue from this sector. In fact, the central government has maintained that it is in favour of bringing petroleum into the GST regime and it is only States that have resisted the move. It is thus time to make good on these claims.
The original aim of bringing in the GST was to simplify the tax structure and also give a boost to GDP growth. The first objective has been achieved to a large extent though much greater simplification and rationalisation is needed to improve the effectiveness of the tax. But it has not yet been able to give a spur to growth. This aim will only be achieved in the medium and long term if the many layers of the tax are reduced and it is made more in line with the initial concept of a single point levy.