Implementation of GST exactly five years ago was considered as the largest post-Independence tax reform. It became a reality after preparation of more than a decade. How did this most difficult reform come about?
Political commitment to GST:
The first and foremost was the political will of GoI under the leadership of PM Modi. The second most important factor was the persuasive ability of former finance minister Arun Jaitley, who was accepted across all political parties. Therefore, it was easy for the GST Council to take important decisions relating to the framework of GST in 18 meetings which were held prior to implementation of GST on July 1, 2017.
The third most important factor for the success of GST was the spirit of cooperation and hard work exhibited by the officers of the central and state governments. Having a permanent common civil service helped in this. Before every meeting of the GST council the state commercial tax officers and the CBEC officials used to meet on the previous day to thrash out all differences.
Challenges that were overcome:
Several questions were raised at that time about the structure of GST. One of them was the decision to have four different rates for different categories of goods and services in addition to the exempt category of goods and services. It was forgotten that prior to GST there were more than 20 slabs of taxes imposed by various state governments on various commodities. For a country like India with so much disparity of income it is unimaginable to have a single rate of GST on all products and services. The basic principle in deciding the four-slab structure was that no commodity should bear more tax than it used to have prior to GST. Also, revenue neutrality of the entire proposal was also to be kept in mind.
One more issue that was hotly debated at that time was duality of control by central and state authorities. The view from businesses was that there should be a single authority that they should be dealing with. Ideally, GoI should be the only one collecting GST and it should share the proceeds among the state governments based on some objective criteria. However, this would have been unacceptable to states that had already sacrificed their financial sovereignty partially in favour of the GST Council.
Results are evident:
A way was found for sharing of powers of supervision, without subjecting dealers to duality of control. However, slowly we have to move in the direction of having a single authority in charge of GST, so as to reduce duality. The collection from GST has been on expected lines. Average total GST revenues of GoI and states crossed the Rs 1 lakh crore mark consistently starting October 2020. GST Revenue collection for April 2022 was the highest ever at Rs 1.68 lakh crore.
There is also significant improvement in filing of tax returns. Return filing percentage for GSTR-3B, filed till the end of filing month, which plateaued around 71-72% earlier, has now increased to 85-90%. Auto-population of data has also improved data quality in statutory returns which, in turn, facilitates efficient intervention by tax officers for scrutiny/audit.
Future agenda:
First, out of the five items of the petroleum group, LNG and aviation turbine fuel (ATF) should be brought into the purview of GST as early as possible. Having uniform rates of GST on ATF along with the facility for input tax credit will help the aviation industry in a big way. LNG is a feedstock for many items of production. However, because it is not a part of GST, input tax credit on LNG is not available. This creates cascading of taxation for many commodities. Second, a fool-proof return filing system should prevent any possibility of input tax credit frauds being perpetrated by some elements. Third, with the help of rich data available with banks, depositories, various tax authorities, tax evasion should be easily prevented. The annual statement of information introduced by the income tax department is an excellent example of how nudging is so useful in better tax compliance. Fourth, the time has come for further rationalisation of the GST tax structure by reducing the number of slabs from four to three initially. This should correct the inverted duty structure which is existing in some cases today. Finally, imposing moderate tax on some exempt goods and services may also be the step in the right direction.
The writer served as Revenue Secretary in GoI from 2015 to 2018
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