After four years, the promises of the Goods and Services Tax (GST) remain substantially unrealised.
A GST version 2.0 may have to be designed soon given the flaws in the existing structure.
What is the overall outcome?
The goal of avoidance of cascading of various taxes is not met.
The tax system continues to be a not very transparent multi-rate system.
There are also associated difficulties in computing and assessing tax liability, tax burden and tax incidence.
States have less headroom in handling GST collection shortfall after surrendering their fiscal autonomy.
The tax base of GST does not appear to be expanding as the recent uptick has reversed in July 2021.
Revenue collection of the GST is dependent on the nominal growth rate of Gross Value Added (GVA) in the economy.
The Tax to Gross value addition is only about 5% to 6.5% though GVA growth was much higher.
This indicates that a very large segment is covered by exemption, composition schemes, evasion and lower tax rate.
What are the key challenges in the current GST structure?
Disputes - The fundamental weakness of the GST is its political architecture as it is asymmetrically loaded in favour of the Centre.
No particular body is tasked to adjudicate disputes, between States and between the Centre and the States, that are inevitable in a tax arrangement as the GST.
This is despite the fact that the original Constitution (115th Amendment) Bill 2011 (GST Bill) had a provision for such an institution.
Compensation scheme - GST Compensation Cess was introduced to compensate the losses of states for the first 5 years under the GST regime.
Severe fiscal strain is expected when this 14% compensation comes to an endin 2022.
The contraction of GST revenue across the country means that the compensation amount will be higher.
So, the demand for a continuance of compensation scheme is inevitable.
What are the other issues to be resolved?
Design flaws-Nearly 45% to 50% of commodity value is outside the purview of the GST, such as petrol and petroleum products.
In addition, States which export or have inter-State transfers or mineral and fossil fuel extractions are not getting revenue as the origin States.
They require a compensation mechanismto get this.
Most trading and retail establishments, (however small) are out of the fold of the GST.
At the retail level, irrespective of whether Input Tax Credit (ITC) is required or not, the burden can be passed on to the consumer.
As a result, the loss could be as high as one third.
Exemptions - Exemptions from registration and taxation of the GST have further eroded the GST tax base compared to the tax base of the pre-existing VAT.
Exemptions are purely distortionary and directly increase evasion or misclassification, and reduce tax realisation.
Exclusion- Petroleum products remaining outside the purview of GST has helped the Centre to increase cesses and decrease central excise.
This would have otherwise been shareable with the States.
In April 2017, cess and surcharge formed 56% and 35% of the excise duty on petrol and diesel, respectively.
Now, their share has increased to 91% and 85%, respectively.
But the shareable central excise (with the states) has reduced by ₹6.5 a litre together (both petrol and diesel).
GSTR - Compliance with GST return (GSTR-1) filing stipulation and the resultant tax information is not up to date.
Also, fraudulent claims of Input Tax Credit (ITC) because of a lack of timely reconciliation are quite high though it has come down by two thirds.
Tax evasionis at least 5% in minor States and plus 3% in the major States.
What do these call for?
Instead of the four rates/slabs, a single uniform tax rate for all commodities and services at all stages, inputs and outputs alike, would work better.
Over all, policy gaps along with compliance gaps need to be addressed.
Without proper tax information, infrastructure and base, the States would go in for selective tax enforcement.
In the long run, voluntary compliance will suffer and equity in taxation will be violated.
Given all these problems, a version 2.0 of GST may have to be designed sooner rather than later.
