Today, 1st July 2022, India completes five years of the introduction of the Goods and Services Tax (GST). I’ve tracked the passage of GST from its rocky start, demanding a shaky portal handle even with a matching voucher requirement, and horrific penalties for not submitting forms by the stipulated deadline. Those procedures were fortunately simplified after four months. But early mistakes made the tax unpopular, and to counter it, a set of ham-handed cuts in rates were introduced, which reduced revenue collection and did little to fix the main problem, which That was the wrong principle on which the rates were fixed.
Now is the time to step back and look at the big picture. The good news is that after five years, GST has shown impressive staying power and resilience during the pandemic years. The real test of GST is not so much its revenue performance, which is fair, if not spectacular, but its gradual development is in wide acceptance.
Another good feature is that, contrary to media hype, GST has strengthened the Indian Union by enabling stronger input tax credits even when supply chains cross state borders. The narrative that it has weakened the federation by imposing an authoritarian center on the fiscal freedoms enjoyed earlier by the states is largely a result of the issue of GST compensation, even if it is ultimately taken up by the Center for special borrowing to the satisfaction of the states. was resolved for. Compensation is due.
In the 47th GST Council meeting that ended on June 29, several states have urged for extending the compensation guarantee beyond their initial five-year life. Guaranteeing 14% annual growth in GST revenue to all states was unfair in the first place, given that only five states had experienced annual revenue growth of 14% or more (in taxes subsumed by GST) in the past five years. (Rajaraman and Gupta, EPW, 28 November 2020). The paper argues that compensation in the form of a flat top-up for 14% revenue growth for all should have been calibrated differently for the tax buoyancy.
In the best tradition of interim provisions, the due date for GST compensation was known from the outset. Some states may be facing an imminent financial calamity today, but poor management of reforms in the power sector has a lot to do with it. I tracked the Parliament Questions on GST during the period of the Sixteenth Lok Sabha ending in May 2019. The questions asked showed a step towards concern over the revenue issue common to both the Center and the states, away from the initial adversarial questions of the GST design. and processes.
Still, there is clearly a feeling among some if not all to say they lack voice. The latest meeting of the GST Council marks a fresh change from the previous meetings in systematic discussion on reports on specific subjects prepared by the Groups of Ministers. The longer duration of the meeting would have also given more opportunities for voices of dissent to be heard.
But there is actually a serious downside of GST, which has to do with transactions between two entities on opposite sides of the GST registration turnover limit. Like any standard indirect tax, GST is levied on the buyer but collected and remitted by the seller, on the general assumption that multiple buyers map to a single seller. But in India, where there was a thriving ecosystem of small industry supplying inputs to formal manufacturing units, many small sellers were mapped to a single large buyer. Hence the Central GST Act provided for Reverse Charge Mechanism (RCM) to be paid by the (registered) large buyer, and without any loss, as input tax credit can be legitimately claimed against the tax paid. was. This classic provision was put on hold by notification, and later it was extended to only one or two notified areas.
This has caused untold losses to the unregistered units which could not supply the vouchers required to support the input tax credit claims by the buyer. Many of them opted to remain unregistered even if the turnover is above the threshold to evade the GST reporting requirements. They went out of business. This has had a devastating impact on the growth trajectory of the Indian economy since 2017, which is worse than the damage done by Covid. The loss can be compensated with a flick of the pen, as there is already a provision of RCM in the law.
The paradox is that the state-level value-added tax (VAT), which was introduced in most states in 2005, encouraged the explosion of small-scale units, as it replaced the incentives in the earlier tax structure for manufacturers as a company. Finished to integrate vertically within. production, so as to save sales tax on input purchases from outside vendors even within the state. This was a key factor driving broad-based growth momentum after 2005.
Restoration of RCM will attract small scale entrepreneurs, and eventually also encourage them to register themselves to avail input tax credit. In this hope, here’s wishing you lots of happiness in GST.
Indira Rajaraman is an economist