TCA

Srinivasa Raghavan

governments

Vijay Kelkar

Ajay Shah

Ranganathan

The Goods and Services Tax (GST) was introduced on July 1, 2017. A new body called the GST Council was created for this and the central government handed over its right to tax to this body. All states are members of the GST Council.It has been more than two and a half years since the GST became a part of the country’s economy. AsRanganathan and TCAwrite in All the Wrong Turns: “This [i.e. the GST] has rightly been described as a ‘game changer’ because earlier India imposed hundreds of different indirect taxes. Goods were taxed before they left the factory by the central government. Then the statetaxed them when they were sold. … The economic effect of a single tax is to prevent cascading of taxes of goods and services.”The idea was to do away with paying a tax on tax and essentially introduce a new system which was simpler and more transparent than the previous one.Of course, at the same time, the governments had to earn their fair share of revenue.But that has not happened. In 2018-19, the central government had hoped to earn Rs 6.04 lakh crore through the central GST. This was revised to Rs 5.04 lakh crore.The total amount finally collected stood at Rs 4.58 lakh crore, around a fourth lower than what was originally envisaged.In 2019-20, the central GST target was originally set at Rs 6.10 lakh crore in the interim budget presented in February 2019.Good sense then prevailed and the number was revised to a much lower Rs 5.26 lakh crore, when the actual budget was presented in July 2019.In the first eight months of the financial year, April to November, Rs 3.28 lakh crore has been collected as central GST, at an average of around Rs 41,000 crore per month. The average needed to meet the target stands at around Rs 43,800 crore per month.One of the major reasons that GST hasn’t gone as planned is because of the multi-rate GST system that the Council chose to implement. About 80% of the countries which have introduced GST after 1995 have done so through a single rate system. Asandwrite in, In Service of the Republic: “A simple single-rate GST is easier to implement, as opposed to a complex GST system with multiple rates.”We did exactly the opposite of this. There were multiple reasons for this.One lay in the fact that all state governments had to be taken together on this. Asand Raghavan write: “The story of GST in India is a good example of how trying to please everybody leaves almost everybody dissatisfied.”Also, there was a single-minded focus on revenue neutrality, that is, trying to earn an almost similar amount of revenue through GST, as the earlier system. The problem here, as Kelkar and Shah put it, was: “The emphasis on revenue neutrality in the GST, in the short run, was a mistake. Government is an important buyer of goods and services, and a low-single-rate GST would yield cost savings for all levels of government.”Over and above this, like in any Indian system, the ultimate system design was fairly complicated.As Ranganathan and Raghavan write: “The input tax credit system, far from being a seamless chain in the entire supply process has become a morass of paperwork and exceptions.”Also, our obsession with sin taxes hasn’t helped. Nevertheless, as Kelkar and Shah put it: “It is always possible to layer… sin taxes on top of the basic GST… Individual state governments can choose how they wish to think about alcohol taxation.”Two and a half years later, the time is actually right to move towards a simpler single rate GST, without exceptions. This will be easier to implement and at the same time the government will collect more tax. As Kelkar and Shah write: “A single 10 per cent rate applied on 70 per cent of the economy yields 7 per cent of the GDP as tax revenue, and even if we actually obtain a part of this, we are broadly okay.”The time is right for a rethink.