The goods and services tax
(GST) finally became law in 2016, with cross-party support in both Houses of Parliament, and all state legislatures passing it. GST
has come in for a lot of criticism, but it is useful to step back and view it as a whole. To replace excise duty, sales tax, luxury tax, octroi and myriad others taxes and duties, which varied across states in quantum and implementation, with one tax was fundamental progress. To provide a complete set-off for all input taxes, was an essential contribution to competitiveness. Thanks to these two changes from what we had earlier, GST
is a landmark policy reform that has taken the country forward.
Having said that, several major problems must be addressed. We took the path of “fitting” the multiple old taxes into a set of rates. This eased implementation, but has led to too many rates — seven in all, 0, 3 per cent, 5 per cent, 12 per cent, 18 per cent, 28 per cent and then the cess items. By fitting, instead of unifying, we have repeated the earlier complexity. To take just two examples — of something that is even more complex than when GST
started — a restaurant can carry a different GST rate if it is in a hotel with a room tariff over Rs 7,500 or an independent restaurant. Footwear that sells for less than Rs 1,000 carries a GST of 5 per cent, with other footwear of 18 per cent. Further, as the passage of GST required their support, states insisted that GST returns be filed separately in each state where one wanted to claim set-offs.
Multiple rates combined with multiple registrations and filings of returns have hugely complicated the GST. This has had two consequences: Smaller firms have struggled to cope with the system, and the GST system has struggled to automate the matching of input invoices with output invoices. The GST Council has responded by postponing when returns must be filed for smaller firms, reduced micro, small and medium enterprises (MSME) filing to once in three months instead of each month, and raised the exemption limit repeatedly so that a turnover up to Rs 1.5 crore can be exempt by paying a 1 per cent tax. Electronic invoice matching is still not done. And the onus of the correctness of the supplier’s invoice and actual tax payment has been transferred to the receiving firm (how a firm can be held responsible for the accuracy of some other firm’s invoice and accounts will probably end up being settled in court).
Illustration by Binay Sinha
This complex system creates a large incentive to stay out of the tax net (there are stories of firms whose business is fake invoices). The net effect is that GST collections have consistently underperformed — missing their budgeted target this year by Rs 1.5 trillion (or almost 1 per cent of GDP). So GST must be reformed. How? Our principles should be simplicity, comprehensiveness and low rates.
A simpler structure
We should have at the most three or four rates — 0 per cent for essential food items, 12 per cent for everything else, and a high tax for “sin goods” such as aerated drinks, tobacco and alcohol (I’m open to being convinced that getting from here to there needs the additional 28 per cent rate in the interim). Registration and filing of all returns should be with one authority — with the Union government and states having equal access to the data. Then make GST comprehensive: Bring the remaining items — fuel, construction, alcohol — in its fold. Have everyone file every month, but in one place alone instead of 29, and drastically lower exemption limits — from Rs 1.5 crore to, say, Rs 10 lakh. Use the economic census of business enterprises to ensure all firms are registered for GST, and prompt an inspection only if a firm is not paying GST broadly in line with its declared number of employees. Let us close the door to the exemptions that facilitate evasion, instead of bringing in draconian penalties to deter walking through an open door. Bring everyone into the net, and make the filing — and therefore e-linking— of invoices simple.
Lower the stakes as we learn
When GST came in, the GST Council insisted on setting up an authority whose remit was to ensure firms passed on any immediate benefits from a reduced tax rate to consumers. This, apart from being a throwback to the 1970s socialism, was always a bad idea: The best way to control one firm’s behaviour is through competition from another firm. But at least the National Anti-profiteering Authority (NAA) was to have a life of two years, and then vanish. Come July 2019, instead of vanishing, its term was extended by another two years. This last Budget had a (welcome) section on trust, and decriminalising commercial offences. It then diluted this powerful message, by criminalising the “fraudulent availing” of input credits under GST on the mere grounds of the tax authorities having a “reason to believe”. Shouldn’t they prove it first before arresting someone? So let’s make the stakes lower while we learn how to make GST a huge success— scrap the NAA now, and decriminalise all offences unless fraud is proven in a court of law.
The GST Council is chaired by the Union finance minister with membership of all state finance ministers. This is a unique institution, where Arun Jaitley’s expert initial chairmanship established principles of discussion and consensus. It is exactly how a federal democracy like us should make major policy. Frequent meetings and vibrant discussion are good to build consensus and conviction. But they have one big disadvantage. When senior politicians get together once in three months, they seem to think they must, always, Do Something. So they listen to industry and then tinker with rates, change forms, and twiddle exemption limits. The finance minister perceptively suggested earlier this month that rates should be reviewed only once a year — “once a year” should apply to all it does. It also needs a strong technical secretariat that does the homework and proposes improvements to the Council. A 30-member Council trying to devise solutions reminds one of the saying that a camel is a horse designed by committee.
GST was a major reform, an essential platform for firms to be efficient. It was also intended to lead to great tax buoyancy that would raise the tax-to-GDP ratio above the 10 per cent or so it has been stuck at for 30 years. It still has the potential to do so, provided we simplify, lower and make GST comprehensive. And we must make the administration benign — by scrapping the NAA and decriminalising commercial offences. It can then truly be a tax that illustrates how less government delivers great results.
firstname.lastname@example.org. The writer is co-chairman Forbes Marshall, past president CII, chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre