The Unfulfilled Promise of the Goods and Services Tax

Context: Contour of GST and Right time to fix the unfulfilled promise. 

GST which was considered as path breaking, progressive, transformative biggest taxation reform in India failed to fulfil most of its promise. 

Advantages: 

• Simple Tax System: By subsuming a jumble of indirect taxes levied by the Centre and various states, GST put an end to much of the earlier compliance headache for businesses.
• Reduction in Tax Evasion: It did away with check posts at state borders, and closed avenues for cross-border tax arbitrage, thus squeezing the low-level corruption associated with all this in the pre-GSTera. 
• End to Cascading effect: 

• Since the GST was only applicable to value addition, many enterprises have gained from tax credits for taxes already paid on inputs. 
• They no longer worry about a cascade of levies upon levies pushing up costs all along their supply chains.

• National Integration: It was a move that would support national integration and give the economy a fillip by introducing a single tax for one nation. 

Issues with the GST: 

• Out of Tax net: Large parts of the economy remain outside the GST net, belying the concept of “one nation, one tax". This problem has plagued many businesses, since costs like electricity and fuel are not included in the GST net, and hence are not eligible for tax credits.
• Higher Tax Rate slabs: Its relatively high rates have made both industry and services less competitive, especially in comparison with their international peers.
• Multiplicity of tax slabs: We are still following progressive taxation, where rich must pay for the poor, instead of one simple tax In all, we have at least seven GST slabs now. 
• Arbitrariness: The classifications of goods tend to be arbitrary. The tendency for bureaucratic tinkering with rates and classifications persists. Such arbitrariness has resulted in confusion, uncertainty and litigation. 
• Continued existence Anti-profiteering authority: There is a danger of the anti-profiteering authority, which can pounce on anyone, any time. It was supposed to end within two years. 
• Unresolved Inverted Duty Structure: Due to non-uniform GST rates in a value chain, an upstream player is often left with unutilized input tax credit, which affects pricing and competitiveness.
• Key GST promise yet to fulfill:  

• It hasn’t led to higher growth, nor tax buoyancy, nor much lower prices for products and services since its implementation.  
• Banking sector woes, stagnant investment and business confidence have also caused the downturn.

• Technical glitches: 

• The software systems in use are too complex for individuals and modest businesses, and input credits are hard to get. 
• The early phase of GST implementation suffered from glitches mainly due to its network. 
• The E-way bill is still far from functioning smoothly. 

• Design issues: Since everything was pegged to RNR (“revenue neutral rate"), the entire GST system drifted far above the 12% rate envisaged in the original tax reform reports of 2001-02. 
• Issues related with compensation to states:

• A blanket five-year guarantee gives states no incentive to make tax efforts of their own nor it makes an allowance for the economic downturn.
• Compensation to states is inadequate or delayed, or both.

Way Forward:

• Impose just one rate on most goods and services, with a few “merit" items, asked to pay half that rate and a few unhealthy or luxury purchases asking twice the rate.
• Any GST system ought to be comprehensive in coverage - alcoholic drinks and petroleum products should be under the GST net. 
• The technical glitches need to be fixed.