Seven years and counting: The resounding triumph of GST

Zhou Enlai, the first prime minister of the People’s Republic of China, is said to have responded to a query about the influence of the French Revolution by stating, “It’s too early to say.”

This may be apocryphal but applies equally to any assessment of the most audacious tax reform — the Goods and Services Tax (GST).

July 1 will mark the seventh anniversary of the launch of GST. It needed political determination and a huge leap of faith in a taxation system that required both the Centre and the states to substantially surrender their fiscal powers.

This, in a microcosm, is the story of GST: the many concessions that the Centre and the states had to make to get it up and going.

GST has been an outstanding success. It has subsumed the multiplicity of indirect taxes in the country, permitted the seamless flow of credit and truly made the country ‘One Nation, One Tax’.

A collateral benefit, which is often overlooked, is that it expedited the digitisation process by ensuring all returns are filed digitally across the country. The GST Network (GSTN), after initial teething issues, has settled down.

But, despite the success of GST, as is evident from the steady growth of revenue year-on-year, it is still a work in progress. Nothing exemplifies this more than the plethora of decisions and clarifications recommended by the GST Council in its last meeting, the 53rd held on June 22, 2024.

There were recommendations on rates, measures to improve compliance including an ill-advised amnesty scheme, reducing litigation by prescribing
monetary limits for filing appeals by the government and phasing out the anti-profiteering provisions.

We will have to await the Union Budget, through which the Council’s recommendations will be implemented, as also for the actual notifications and official clarifications, to understand the import of all these recommendations.

What then is the road ahead for GST?

A criticism that GST has had to face is the multiplicity of slab rates and the need for lesser slabs or a uniform rate. Is
this practical?

While equity is the hallmark of a good tax, it should not be forgotten that an indirect tax is regressive. It makes no distinction between the prince and the pauper. So, equity was achieved while finalising GST rates by ensuring that nearly 50% of the items in the consumer price index basket were kept at zero.

Economics is as much politics as it is economics, and to have a uniform rate, like Arun Jaitley famously said in Parliament, for ‘Hawaii chappals’ and refrigerators is never going to be politically acceptable.

What the council can perhaps consider in the first instance is to examine and identify groups of commodities, which can be bunched together, and suggest a single rate, while being conscious of the danger of inversion as also the impact on revenue.

What the council should be seriously looking at is pruning exemptions, as they are an aberration in the GST scheme of things, encouraging lobbying and arbitrage; they also break the credit chain, distort GST and add to costs.

The council should look at trying to broaden the GST base by bringing in petroleum products; this, too, has been much debated but never seriously pursued since they are a major source of revenue for the Centre and the states.

Bringing in some products from the petroleum basket, like natural gas or aviation turbine fuel into the GST fold, which are unlikely to hurt either the Centre or the states, can be considered.

Retrospective application of rates/clarifications should be strictly avoided. A case in point is the confusion caused regarding the interpretation of a levy on online gaming.

The council waited for too long to step in and clarified in 2023 that the higher rate was always applicable from 2017. The government should increase investments in data analytics and forensics.

The government should make the data available in GSTN public as this will facilitate research by universities and think tanks and strengthen the hands of the government.

A perennial area of concern is evasion, especially in credit being availed incorrectly or worse by creating fake documents. Tax administrations necessarily must come down heavily on such offenders and tighten processes. 

A corollary to this is to ensure there is speedy dispute resolution. The GST Tribunal needs to urgently start functioning and the process of selecting members, establishing offices should be expedited.

What tax administrations should do is to focus on skill upgradation of staff across the country. This should be a constant exercise as a good tax policy in the hands of a poor tax administrator dies a painful death, causing agony to the taxpayer.

Too many posts are lying vacant and hurting efficiency. As on July 1, 2022, nearly 50% posts across cadres were vacant in the Central Board of Indirect Taxes & Customs (CBIC).

Despite all the challenges, GST is an unqualified success. The government has much to be proud of.

An endorsement, if required, came in the form of a recent industry survey conducted by Deloitte, which showed that 72% recognised the positive impact of GST. It will only improve going forward. The anniversary is indeed a cause for celebration.

(The writer is chairman (retired), Central Board of Indirect Taxes & Customs)