A Win-win Bargain

Context: The GST Council is set to meet. Although the agenda focuses on specifics, the time is ripe to take up a broader objective, that is, leaving the disputes behind and constructing a way forward for GST.

Setbacks of the current GST model

• Revenue collection is lagging: Before GST, in 2016 revenues yielded Rs.9.7 lakh crore, while the collection soaring to Rs. 11.8 lakh crore in the first full year of GST in 2018-19.

• The revenue collection growth rate decelerated sharply in 2019-20 and in 2020-21 collections actually fell.

• Federal issues: As a result, there have not been enough resources to satisfy the needs of the Centre or the states. Compensation issue outgrew in proportion amidst pandemic.

Way forward: Three key changes are necessary

• Recast Compensation mechanism: Five years ahead of implementation, GST reform has matured now and there is no need for a guaranteed protection of state’s revenues. Although there exists a case for revenue guarantee during revenue shocks like COVID pandemic.

• Compensation guarantee should be converted into revenue insurance: States shall give up their demand for an extension of compensation mechanism, while Centre shall offer a new counter-cyclical buffer.

• Simplify and rationalize the rate structure: The new structure should have one low rate (between 8% and 10%), one standard rate (16% and 18%) and one rate for all demerit goods.

• The average incidence of the GST will increase as the rate cuts effected since 2019 are reversed.
• Eliminating the cesses with all their complexity: For example, taxes/cesses based on the length of cigarettes are an absurdity deserving immediate abolition.

• Improve governance model: There shall be a shared sense of participatory and inclusive governance in GST Council working.

• Discussions in the council could be steered by the central Finance Minister (Chair), aided by a finance minister(vice-chair) from Opposition state, rotating periodically.

Conclusion: After one and a half years of dispute, and with the economy showing signs of recovery, a path forward for the GST finally seems visible. This opportunity needs to be seized.