GST at 5: Succeeded, but long way to go

The woods are lovely, dark and deep, but I have promises to keep, and miles to go before I sleep, before I sleep – Robert Frost’s quote very aptly suits our GST regime that celebrated its fifth birthday on July 1, 2022. Did GST succeed? If it did, to what extent? What are the issues that still persist and what is the way forward?

At midnight five years ago, the Indian Parliament’s Central Hall witnessed the nationwide launch of a new Indirect Tax regime in the form of Goods and Services Tax (GST). The existence of deficiencies in the erstwhile regime, say, cascading effect of taxes, wide varieties of local as well as central duties and levies, and non-integration of tax administration has compelled the Union government to bring in ‘One Nation - One Tax’.

Did GST succeed?

Given the geographic vastness and diversity of the country and the complexities involved in getting everybody on board, one could say GST succeeded to a great extent, but not fully, as quoted earlier. The implementation brought with it a number of advantages like an integrated national market from Kashmir to Kanyakumari, preventing cascading of taxes, check-posts-free State borders, reduced incentives for tax evasion and replacing various indirect tax laws or rules with harmonised laws. However, five critical issues require urgent attention of all concerned: Revenue buoyancy from states-perspective, the extension of GST compensation, delay in bringing down tax slabs, non-inclusion of certain goods & services and Supreme Court’s latest shocker to the spirit of federalism.

Revenue buoyancy for states

Since its inception, the GST collections have been more or less steady barring a few months during the pandemic. In fact, June 2022 witnessed the second-highest collection, after April 2022, at Rs 1.44 lakh crore. As far as the Centre is concerned, the figures are very encouraging but the same is not in the case of all the states/Union Territories. GST has been a boon for most northeastern states whose revenue shortfall has narrowed gradually. For states like Arunachal Pradesh, Mizoram, Manipur and Sikkim, their GST revenue collections have surpassed the guaranteed annual compensation of 14 per cent. However, other states like Puducherry, Punjab, Nagaland and Uttarakhand, saw the highest revenue shortfall being offset by guaranteed GST compensation, which ended on June 30, 2022. The silver lining is that the revenue shortfalls in FY22 have narrowed compared to FY21.

Extension of GST compensation

As far as states are concerned, despite surrendering their fiscal autonomy, guaranteed compensation at the rate of 14 per cent. for a period of five years came to an end on June 30, 2022. In the recently concluded 47th GST Council Meeting, there was an expectation of some breakthrough, where around 12 out of the 16 states, who spoke on matters of compensation, sought an extension. In the Finance Minister’s own words, they sought an extension for atleast a few years, if not for five years, and the question of extending it will be mulled, maybe, in the upcoming GST Council meeting in August.

While the non-extension of compensation may have little bearing on the finances of certain states, the same is not the case for other states. Given, the dire finance requirements of the states caused by the pandemic and revenue shortfalls, the writer suggests an extension of the compensation period at least for two more financial years ending March 31, 2024.

Delayed cut in tax slabs

Since India is a federal country, both the Union and the states have powers to levy and collect taxes. For instance, any intra-state supply, taxes to be paid to the Central Government in the form of Central GST. Similarly, for any Inter-state supply, taxes to be paid to both the Central Government as well the State Government in the form of IGST which will have components of both Central GST and State GST. Current GST rates are ‘0’ or Nil, 5, 12, 18 and 28 plus applicable cess. According to World Bank’s biannual ‘India Development Update Report’ released in 2018, most countries have a single GST rate whereas our regime is among those with the highest in the world. The 28 per cent tax slab is the second-highest among 115 countries having GST. The Finance Ministry has to take a fresh look at cutting tax slabs without delaying it further. The constitution of the Group of Ministers (GoM) to deliberate the rate rationalisation issues has ignited the hopes of a reduced tax burden on end consumers, down the years, if not immediately.

Exclusion of certain goods and services

While implementing the new Indirect Tax regime, the Union Government had kept alcoholic liquor for human consumption, natural gas, petroleum products, electricity, employee services, and actionable claims other than lottery, betting and gambling outside the purview of the GST. Due to the absence of states’ consent, their inclusion was not easy. The reason may be the fact that the effective sales tax on petroleum products varies from state to state. For instance, petroleum products and liquor alone used to generate about 40 per cent of the total indirect tax revenue for states in the erstwhile regime. This worries the states about the impact of the inclusion of such products under GST on their fiscal independence. But, with a consistent demand for the inclusion of petroleum products by all sections, burdened by inflation, it is high time for all concerned to sit across the table, remove the anomalies, and try to bring them under the GST bracket.

Supreme Court’s verdict & Federalism

The recent Supreme Court’s verdict in Union of India v. M/s Mohit Minerals Pvt Ltd holds that GST Council decisions are not binding on the Union or/and the states. This was expected to disrupt the fiscal federalism / smooth conduct of the meeting. However, the verdict is in no way the end of the road for GST, since states do not have the ‘Constitutional powers’ to impose any new tax. Hardly there will be any deviation in the implementation of the decisions taken by the GST Council. As its part, the Union government is exploring all available remedies, say, filing of review petition before the larger bench or curative petition before a five-judge bench or bringing retrospective amendments in the upcoming monsoon or winter session itself. At the same time, the onus lies on the Finance Minister-headed GST Council to function more democratically, by taking all the states into confidence.

Concluding remarks

Implementation of GST is truly a remarkable achievement for any government. There were hardly any disruptions all these five years barring GSTN’s technical glitches and refund-related issues. Geographically, India is a vast country and GST law is continuously evolving. It may need two more years to settle down fully, as Winton Churchill quoted ‘success is not final, failure is not fatal; it is the courage to continue that counts!’. The Union government’s confidence-building measures with states, taxpayers and other stakeholders are the need of the hour.

(The writer is the Founder and chief executive officer of Shree Tax Chambers)