This Steel Frame Is Holding Up

Context: Implementation of Goods and Services (GST) system brought in outstanding gains on multiple fronts, yet there is a need to reform, refine and strengthen the system to address challenges at hand.

Outstanding gains made by implementation of GST system

• Unique to India’s federal structure:  Dual Indian GST is unique to India’s federal structure.
• Integrated GST (IGST) is a unique Indian construct that ensures transfer of tax to destination jurisdiction with GoI in the role of a ‘partner-depository’.
• Other aspects: Placed supply rules, input credit mechanism, threshold and treatment of small taxpayers.
• Reduced tax burden and fiscal gains: Average monthly revenue from GST (till February 2020) grew at a compound annual growth rate (CAGR) of more than 9%, despite the effective weighted average tax burden coming down 4 percentage points.
• Facilitating ease of doing business: Multiple and complex compliance burdens became redundant (17 different taxes merged into one, and two statutes replaced about 150 different ones).
• A largely semi-manual tax reporting system across the country gave way to a single online core reporting system, and inter-state fiscal barriers came down substantially.
• Increased compliance: Number of registered taxpayers more than doubled during four years, despite an almost two-fold increase in registration threshold.
• Furthering cooperative federalism: Council has not witnessed voting, except on one occasion, in its 43 meetings so far, and every state has been an equal participant to proceedings.

Challenges at hand

• Economic slowdown and pandemic: Minor global economic slowdown in 2019-20 and then, just as it was emerging out of it, Covid-19 pandemic struck.
• Issues in compensation to states during difficult times: GST Council devised a borrowing mechanism.
• Borrowings amounts to Rs 3.2 lakh crore, which is likely to be repaid by 2024 if cess collection grow by 10% year-to-year. Yet, arrears of compensation for FY 2021-22 onwards bound to accumulate.
• Thus, compensation at an assured CAGR of 14% is unsustainable.

Way forward: It’s time to reform, refine and strengthen GST, not rewrite it.