What Four Years Of GST Have Taught Us About This Tax Regime

Context: There’s a long way to go for the GST system to fulfil its promise, even as many of its myths have been demolished.

Promises of GST when it was implemented

• Accelerated growth: GDP growth will increase by 1-2 percentage points.
• Lowering down of Inflation.
• Increase in revenue: Clocking Rs 1 trillion every month in GST revenue emerged as a thumb rule for its success.

Challenges

• Issues faced by MSMEs: Micro, Small, and Medium Enterprises (MSMEs) faced serious problems on taxes, refunds, set-offs and fines.
• Concerns overcompensation to states: Need to review 14% growth-determined compensation for five years as it is about to end.
• Continuance of the compensation to consider the impact of extended lockdowns amidst pandemic, Centre’s decision to borrow to cover compensation in FY21 and demands for a 5-year extension of the system from states.
• Large share of exclusions from GST network: Fuel and ‘sin goods’ still out of GST’s ambit.
• Leveraging fuel taxes for higher revenues leading to unintended consequences such as higher inflation, adding to the stresses from rising crude oil prices and a fall in demand amidst pandemic.
• Complexities associated with multi-slab tax regime: There is now a pressing need to reduce multiple rates into a single slab.

Steps taken by government towards streamlining GST regime

• Introduction of ‘composition scheme’ for MSMEs
• Altering of GST rates for various commodities after representation

Learnings from four-year GST experience

• GST cannot itself increase GDP: GDP growth increases only in case there is more income that gets spent, which is best accomplished by creating more jobs.
• Deep contradictions in our tax structure: Inflation will remain beyond the grasp of GST.
• Revenue growth to remain moderate: Higher revenue needs higher buoyancy in the economy, which is not feasible in the present low-growth syndrome.