Goods And Services Tax Reforms: Whose Headache Is It Anyway?

Livemint     15th June 2021     Save    

Context: The introduction of GST may not have yet fully delivered the economic benefits envisaged because of the impact of an impaired financial system and later the covid pandemic.

Major challenges before GST Council

  • Federal concerns amidst economic slowdown: Principle of ‘one state, one vote’ being questioned in the recent GDT Council meeting.
    • The idea is perceived as biased against bigger states as they contribute more than they receive from Centre in terms of tax revenues (Idea of redistribution).
    • The functioning of the Council is moving away from initial spirit of federalism where all states assured an equal voice.
  • Ending of compensation period: After June 2022, when the GST revenue growth guarantee of 14% ends, states cannot wish away the reality of a complex GST structure.
  • High implementation costs: Along with slower activity levels, will hurt future tax collections.
  • Escaping tax liabilities: This results in policy contortions and distortions in tax rates and as compliance costs rise, so does tax evasion. In the process, they stymie economic activity and defeat the goals of revenue growth.
  • Regressive policies: Carving out GST exceptions for the government itself dilutes the framework itself.
    • A recent notification to exempt government departments and local authorities from generating GST e-invoices may not be the right example to set.

Way forward: Council needs to find best ways to raise revenues organically -

  • Convergence of GST rates: The original empowered committee of state finance ministers under Asim Kumar Dasgupta had only proposed two rates, a low rate and a standard rate.
  • Uphold equal application of law: Exempting transactions from GST for governments should be rare and exceptional.
  • Expand the list of products and services that come within GST net: Petroleum products shall be priority.
    • Launch a study to ascertain the reduction of cascading costs across entire value chains by the inclusion of diesel and petrol in GST, especially in the logistics/power sector, since an evidence-based argument will be essential to bring all fuel products within the tax’s ambit.
  • Emphasis of states should be on boosting economic activity: Therefore, simplification of rules, rationalization of rate multiplicity and even a reduction in rates must be the preferred approaches.