GST mess: Two-and-half years on, much-hyped indirect tax reform needs a major overhaul; govt should launch three-slab structure

  • The finance ministers of Delhi, Punjab, Puducherry and Madhya Pradesh and representatives from Kerala, Rajasthan, Chhattisgarh and West Bengal have sought immediate release of payments to states

  • The GST Act mandates that the states should be given compensation for revenue shortfall of below 14% growth for the first five years of the GST roll-out

  • The GST Council is reportedly looking at raising rates on certain products and bring exempted items under the tax net

The Goods and Services Tax (GST), originally pitched as One nation, One rate tax, has till now remained far from that very idea. With its multiple slab structure, additional levies and implementation issues, the whole programme is still a complicated affair to businesses. The expected spike in indirect tax collections—one of the key objectives of GST—has so far remained elusive. Now, after two-and-half years of GST roll-out, fresh issues are emerging. At this point, the GST Council is facing a few major challenges. One is the compensation to state governments promised as per the original Act and second, the issue of revision of rates and slabs.

On Wednesday, finance ministers of opposition-ruled states met Union Finance Minister Nirmala Sitharaman to express their displeasure over the delay in the release of GST compensation that has put them in a tight financial position.

 GST mess: Two-and-half years on, much-hyped indirect tax reform needs a major overhaul; govt should launch three-slab structure

Representational image. News18.

The finance ministers of Delhi, Punjab, Puducherry and Madhya Pradesh and representatives from Kerala, Rajasthan, Chhattisgarh and West Bengal have sought immediate release of payments to states. Compensating the states for revenue losses is part of the original agreement the Centre has committed to the states when the GST structure was formed.

The GST Act mandates that the states should be given compensation for revenue shortfall of below 14 percent growth for the first five years of the GST roll-out. According to reports, states have not got compensation for the month of August and September. Compensation for the period October-November will also be due after 10 December.

There is a difference of opinion as to whether the Centre has enough funds to compensate the states or not. While the states contest that the Centre has enough leeway, the government has said that poor collection and cess in the previous months impacted its financial ability to pay up states. The GST collections so far have been below targets.

Since the GST launch in July 2017, the tax collections have crossed the Rs 1 lakh crore-mark only eight times in 29 months. In the last seven months, the growth in GST revenue collections slipped to single-digit or negative between May 2019 and November 2019.

But regardless of the reason, it is a matter of shame if the Centre fails to honour its commitment or delays the payment to states further since that goes against the original agreement in the Act.

The second is with respect to the revision of rates. The GST Council is reportedly looking at raising rates on certain products and bring exempted items under the tax net. Question is when the economy is facing a tough demand slump and growth decelerating every quarter, is it a wise move to up the tax rates? It wasn’t long ago when corporate tax rates were cut with much hype presenting it as a major step to stimulate the sagging economy. At a time when a major economic slowdown has gripped the economy, it ill be counterproductive for the council to up the GST rates.

The current GST model needs a major revamp—not mere tweaking of the rates—but in the structure itself. With the GST nearing the third anniversary of its roll-out in India, it is time for the GST Council and government to consider a three-slab structure, instead of the present five slabs. This is what Chairman of the Economic Advisory Council to Prime Minister Bibek Debroy too suggested in a recent interview. There should a 6 percent, 12 percent and 18 percent structure, Debroy said. Even former chief economic advisor, Arvind Subramanian had suggested a structure on similar lines too. Doing this will make the GST structure simpler and closer to the original idea of a truly simpler indirect tax regime. There are no two opinions about the fact that GST is a great idea implemented badly in India.

(Data support by Kishor Kadam)

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Updated Date: Dec 05, 2019 11:21:49 IST