GST: A Turning Point

Context: The recent upsurge in revenues offers the prospect of the country breaking out of the long-stagnant tax-to-GDP ratio.

Issues with taxation in India

• Low tax-GDP ratio: Our tax-to-GDP ratio has been stuck at between 16 and 17%.
• Falling incidence of duty: The Fifteenth Finance Commission, in its report based on an IMF study, has said that the GST incidence of duty has fallen from 14% — the revenue-neutral rate — to 11.8%.

Factors responsible for the recent growth in GST collections:

• Better compliance: Prodded by the matching of invoices and better monitoring of permissions granted for registrations through physical verification of the premises and evaluation of the past income tax payment record.
  • Improved compliance has pushed the cash component ratio (ratio of payment in cash to credit) from 20 to 25%, yielding additional monthly revenue of Rs 25,000.
• Better coordination between two tax departments: Central Board of Direct Taxes and Central Board of Indirect Taxes and Customs.
  • The declaration of the GST turnover in the income tax return has made revenue coordination possible, which has led to smaller units covering the unincorporated and the family units paying a greater amount of taxes.

Way Forward: Correcting the incidence of duty and raising the revenue -

• Phasing away the exemptions:
  • Need to restrict GST exemptions only to those items that were VAT exempt in the pre-GST period.
  • Need to revisit the GST rates on tobacco (total annual tobacco production of 800 million kg, only 250 million kg approximately go into cigarette production) and gold.
• Dealing with inverted duty structure: In sectors such as textiles and footwear.
• Expanding the ambit: The real estate sector also needs to be brought under the ambit of GST.
  • This will clean up the land market and increase the revenues more on the direct tax side as the GST rate would be more in the nature of clearing rate to offset the embedded input taxes.
• Support to the small and medium sectors:
  • In order to ensure that large units buy from the small units, GST should be paid on supplies from the small to the large on a reverse charge basis so that the larger units get the benefit of input duty credit in the case of purchase from the smaller units.