Don't over-react on GST

The Goods and Services Tax (GST) Council, the body which comprises Union and state finance ministers and oversees the indirect tax system, met for the 38th time on Wednesday. But this was a meeting with a difference. So far, the Council has been able to maintain a tradition of unanimity, with every member agreeing on changes. However, on this occasion, voting took place for the first time, and the rate on lotteries was increased to 28 per cent. This took place, reportedly, because the Kerala government maintained a resolute opposition to the proposal. While there may have been no alternative, this is not a good harbinger for the future. Indeed, GST in general is looking increasingly troubled. States are deeply concerned about their GST compensation not coming in time, which has stressed their own finances. 

Yet GST itself continues to underperform. This takes on particular salience at a time when, following a drop in corporate income tax rates, the mop-up of corporation tax has actually gone down by over 5 per cent in the months between October and December 2019, as compared to the corresponding period of the previous year. Personal income tax is not showing sufficiently robust growth to make up for it, an indication that an overall slowdown is also partially responsible. Thus, the low GST collection is stoking a fiscal crisis. The finance ministry has set a target of Rs 1.1 trillion a month for GST collection, which is more than the collection in all but the first month of the current fiscal year. It appears that the belief has taken hold that the problem is essentially widespread evasion, and fraud relating to input tax credits.

Various measures are being proposed to address this issue. Several ways to limit the outgo in terms of input tax credit are also being proposed, such as the lowering of the amount that is provided before invoices are uploaded to 10 per cent of the amount from the current 20 per cent. But the government must be very careful in how it approaches anti-evasion mechanisms. In general, giving tax officials targets and enhanced powers to achieve those targets has proved to be massively counter-productive in India. Currently, the thinking appears to be that relaxation in penalties for late filing, alongside some extension in deadlines, might be tried. But it appears a consensus is developing for harsher measures, including enhanced penalties and more powers to block credits for tax officials. As usual, the possibility of arrest is also being thrown into the policy mix. But the government must take a holistic view of the problem.

The success of GST depends upon voluntary participation in the tax. Cracking down too harshly now will scoop up both the innocent and the guilty, and further depress business sentiment at a time when reviving animal spirits is crucial to get out of the current slowdown. What is needed is an overall review of GST’s structure. Can it be simplified in such a way that compliance increases without the use of the metaphorical lathi? The Council must deliberate on the broad direction of the tax as well as specific rates.


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