The GST experience has been largely positive – The Hindu BusinessLine

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It has led to greater formalisation of the economy. But the taxing of fuel must be sorted out owing to its inflationary impact

The GST was probably the biggest reform introduced by the government since 2014. A singular tax structure across all goods and services is efficient, though ideally a single rate should prevail. But given the complexity of federalism and the belief in the principle of ability to pay, different rates had to be introduced. It has, however, been maintained that the system is evolving and rates could be tweaked.

There was some hype created by economists on GST. The structure was to be revenue neutral. And as a corollary, when the economy grew tax revenue would accelerate. Second, it was claimed that GST would bring about significant growth in GDP — by 1-2 percentage points. The rationale was not too compelling, though the models did indicate such numbers. Third, it was argued that with tax rationalisation and removal of inefficiencies, it would lead to lower prices and hence less inflation. The profiteering clause was brought in to ensure that benefits were passed to the consumers.

With five years gone by, it will be useful to evaluate the success of this tax structure. First, the way things have gone, it does look like that rates have been altered within the five-slab structure. The GST Council is looking at fine turning rates to enhance collections.

Second, the inflationary impact has been either neutral or positive after these five years though the average tax rate has come down post GST. Where the rates have been increased, there has been a direct impact on prices which will also include the recent changes made by the Council.

Further, while the rates have been reduced for some items, the benefits have not gone done to the consumer. It is hard to establish that there has been profiteering as there are multiple inputs going into the production of any good with the net impact being nebulous.

Third, the impact on GDP is unclear as the economy was in slowdown mode even before the pandemic struck. Alongside, as prices have only tended to increase rather than decrease, there has not been a case for purchasing power increasing.

Fourth, revenue collections have been a major positive if averaged across this time period. The tax system has certainly brought about greater formalisation of the economy, which is commendable. As claiming a set-off from any purchases made involves having every layer of the supply chain sign in, the GST has brought about a rather radical transformation in the way in which business is done. There are exemptions available under the composition scheme, but in general, there has been better coverage of economic activity.

The least expected development in these last few years was the lockdown which distorted collections to such an extent that the States had to be compensated by the Centre which also ran short of funds. This was part of the GST deal of the Centre with States where the States were to be compensated in case their revenue did not increase by 14 per cent for five years.

While the lockdown was a black swan event, the possibility of severe slowdown in the economy cannot be ruled out in future; hence there is need for the agreements to be revisited to provide for such a contingency.

The States have a point, because joining the GST agreement means loss of power to tax commodities and services. It may hence be worth considering a way forward: whenever the GDP growth falls below, say, 5 per cent there should be an automatic trigger for compensation.

Taxing fuel

As for fuel, presently there is a constant debate on which government should cut taxes. The Centre imposes a flat rate, while the States generally have variable rates. The overall revenue earned is substantial for both the arms of the government and amounted to ₹7.14-lakh crore in FY22, compared with ₹6.37-lakh crore in FY21. It was ₹5.08-lakh crore in FY20 when consumption was higher at 214 million tonnes compared with 204 million tonnes in FY22.

The issue of including fuel in GST needs to be resolved because the inflationary impact is sharp and has secondary and tertiary effects in the economy. At times in order to protect the consumers, the OMCs are made to bear the cost of higher crude prices. While protecting the present level of revenue can be the starting point, a higher GST rate of, say, 70 per cent can be levied, which will make things more transparent. Arguably, the government may stand to lose revenue if crude prices fall sharply. But having a structure in place would be useful as this appears to be the major anomaly in the system.

The GST experience has been a learning exercise which has brought to the forefront the complexities in introducing such a structure. The Council has dexterously steered the economy through this labyrinth. There are some pressing ideological issues that have come up and can be addressed through more deliberations.

The writer is Chief Economist, Bank of Baroda. Views are personal

Published on July 14, 2022


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