Dancing the GST in Step

Context: Goods and Services Tax (GST) framework is faced with unprecedented challenges; Centre and State governments have to step up cooperation and implement major reforms.

Challenges and issues associated with GST taxation regime

• Unjustifiable GST compensation mechanism: When states gave up their powers of taxation, States were guaranteed revenue compensation at the rate of 14% on the base year 2015-16.
• According to the RBI’s annual report on state finances for 2020-21 states that – Except for eight states that have shown a fall in revenue in 2018-19 when compared to 2017-18, all major states have an increase in revenue collections.
  • The loss, if any, in respect of the states is only when 14% assumed growth is calculated.
  • Compensation cess is imposed to raise funding to finance fulfilment of guarantee, negated the vision of subsuming multiplicity of taxes and cesses.
  • This also brings revenue complacency among states.
• Exclusion of petroleum products: On which, still VAT at the state level and central excise duty at the central level is imposed.
• Multiplicity of Cesses and Surcharges: As it need not be shared with states. As per the 15th Finance Commission, total cess and surcharge as a percentage of gross revenue had grown from 12.2% in 2016-17 to 20.2 % in 2019-20.

Way forward

• Expand tax base: Measures needed to bring in petroleum products within GST.
  • Combined tax-to-GDP ratio of Centre and states has to increase from the present 17%.
• Tax administration has to be strengthened: Rationalisation of cesses and surcharges, including considering not extending compensation beyond 2022.

Conclusion: GST is too important a tax reform to be allowed to fail; it is incumbent on the Centre and states to work closely, iron out differences, and make GST work.