GST: A tax reform that’s paying off

Hindu Business Line – 30 June 2018

Revenue buoyancy and better compliance are among the positives of the tax regime since its rollout a year back

One year is probably a good time to evaluate the performance of GST (Goods and Services Tax). At the same time, it is also too short a period for all the advantages of GST to manifest fully. Two advantages of GST have commonly touted: better tax compliance; and revenue buoyancy.

The pleasant surprise is that in the short period, despite problems of return filing and global headwinds, the promise is translating into performance on both counts. Total registrations post-GST increased from around 65 lakh — representing Central excise, service tax and VAT registrants — to a whopping 110 lakh (without double counting), which represent a net gain of around 70 percent.

Interestingly, an analysis in the ‘Economic Survey’ provides an answer to why this has happened. The bulk of the new registrants are in the B2B segment and smaller units are the ones who have voluntarily chosen to register (they could have opted out because of their turnover) because they buy from big units and seek to get the benefit of input tax credit.

The interesting insight in the Survey is that the small units are entering the tax net not because the big businesses are persuading them as buyers but because the small businesses are themselves purchasers from the big. This has happened because GST has integrated the value chain from raw material to retail.

On the revenue buoyancy front, while the GST revenue growth so far is 11 percent, the actual growth would be 14 percent after allocating the Integrated GST (IGST) revenues and adjusting for both blocked transitional credit in the Central GST (CGST) and the unpaid export refund in the IGST revenues.

This would translate into a revenue buoyancy of 1.14 against the historical buoyancy of indirect taxes of about 0.9. Interestingly, most of the States have participated in this revenue gain and have roughly retained their pre-GST revenue shares in the total tax revenue. The gains by the States could have been even higher if they had built better tax capacities through restructuring of their commercial tax departments and by using data analytics to identify tax gaps.

This is particularly required in the area of services where revenue buoyancy in many States like Punjab, Haryana, Uttarakhand and Jharkhand has not been on expected lines. Here, the States are handicapped by historically not being familiar with services taxation and, therefore, require some hand-holding by the Centre. A promising area for the States is to look at their legacy litigation and make a judicious analysis of what cases should be pursued and what not to recover tax arrears.

Institutional robustness

The other redeeming feature of the one year that has gone by is the institutional robustness demonstrated by the GST Council. The GST debates have been vigorous, informed and free, by and large, of political predilections. This has made it possible for the GST Council to respond promptly to transitional problems faced by trade and industry. Return filing is an example of this.

The Council, in its meeting on March 4, 2018, came out with a solution which would lead to movement from the three return system to a single return. What has really been decided is to keep the return simple and capture more information in the annual return which could be used for compliance verification.

A large number of duty changes have been made which has brought a large number of items from the 28 per cent slot to the 18 per cent slot. Going forward, it would be possible to combine the 12 and 18 per cent rates to 16 per cent and slowly phase out the items which fall under the 28 per cent slot.

The rate rationalisation that has been done in the last one year augurs well for a simpler duty structure. Already what has been achieved is significant compared with the bewildering array of rates prevalent in the pre-GST period. Credit must also be given to the Finance Minister for reaching out to the States on contentious issues and taking decisions based on consensus.

Work in progress

What the past year has shown is that there is great advantage in incrementally moving forward. As Max Weber puts it, “Reform is the slow boring of hard boards.” GST is still a work in progress and the next important step would be to bring the excluded items, especially electricity, real estate, and petroleum products, within its ambit.

The inclusion of real estate will clean up the land market and will help the government in its fight against black money. The inclusion of electricity will make Indian manufacturing more competitive by eliminating the embedded taxes due to blocked taxes on raw materials (coal, renewables) and other equipment (solar panels and batteries). It will also remove the disadvantages faced by the exporters of electricity-intensive products where the embedded taxes do not lend themselves to duty drawback benefits.

On the petroleum front, while it may be difficult to bring diesel and petrol under GST for revenue reasons, aviation turbine fuel is a low-hanging fruit.

Bringing it under GST would give the ailing civil aviation industry much-needed relief. Air connectivity to the smaller cities, under the UDAN scheme, would receive a boost.

Gains from GSTN

Another salutary fallout of GST implementation is the rise of the GST Network (GSTN). The GSTN provides technology support to the GST project. The data generated by the GSTN can provide deep insights about the economy. It would also provide data quickly to the policy-makers on various emerging trends in the economy. The usual rounds of statistical surveys provide data in a longer time cycle. Tax data is a quick and reliable indicator of the health of the economy and can be a handy tool for policy-making.

Thus, GST is a reform one can be proud of for many reasons. One of them being the demonstration of government’s capacity to carry out radical reform.