Structural changes | Business Standard Editorials

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GST system needs careful interventions

Goods and services tax (GST) collection in March reached an all-time high of Rs 1.42 trillion. The collection has been above Rs 1.1 trillion since July 2021, and the mop-up in March was 15 per cent higher than in the same period in the previous year. Higher revenue collection will help both the Union and state government finances, which are considerably stretched because of pandemic-related disruption over the last two years. Recovery in economic activity and better compliance seem to be helping tax collection. However, the level of collection is still below expectations and would continue to impart pressure on government finances. The revenue position of the states could weaken further because they will not get compensated for lower collection after June with the completion of five years of GST.

In this context, the GST Council had formed a group of ministers in 2021 to suggest ways to boost revenues, rationalise the tax structure, and address other anomalies in the system. The panel is finalising the recommendations, which are likely to be presented at the Council’s next meeting. While clarity on the recommendations and their likely impact will emerge once they are presented before the Council, what is being reported in the press is not encouraging. According to a news report, the Council will consider doing away with the 5 per cent slab and move some goods of mass consumption to the 3 per cent slab and the remaining to a new 8 per cent slab. The Council will also consider bringing some items from the exempt list into the tax net. According to estimates, 1 percentage point increase in the 5 per cent slab can annually yield additional revenues of Rs 50,000 crore.

While the reported recommendations might improve revenue collection in the short run, the overall direction is not encouraging. By moving goods of mass consumption to the 3 per cent slab, the Council would practically introduce another slab while the need is to reduce this number. Currently, gold jewellery and other such items are taxed at 3 per cent. There are a number of problems with this approach. Instead of simplifying the tax structure, this could further increase complications. Having a large number of slabs also opens up the opportunity for lobbying. Businesses would want to be in the lower tax slabs. Further, this would affect the overall efficiency of the system. A large number of slabs complicates the accounting of input credit, which affects overall revenue generation.

The GST reforms, therefore, must focus on three broad aspects. First, the Council should aim to move to the revenue-neutral level at the earliest. Second, the number of slabs should be reduced. Merging the 12 and 18 per cent slabs, say, at 15-16 per cent could be an option for now. Further, the 5 per cent slab can be moved up and the peak rate can be brought down to make the tax structure more stable. Third, the Council should continuously work on improving the tax administration. It is important to improve the ease of claiming credits and filing returns. It is extremely critical for government finances, both at the Union and state levels, that the GST system performs to its potential. The completion of five years will be an opportune moment to address some of the structural flaws and introduce reforms.

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