July 1, 2017, was a momentous day — the day India pulled off a most audacious tax reform. A reform so far reaching that it was truly worthy of a midnight launch from the central hall of Parliament.
The goods and services tax (GST) is a destination-based, value added tax on final consumption by both the Centre and the states on the same tax base. It required political determination and a huge leap of faith in a fiscal taxation system that had done well separately for states and the Centre, but which nevertheless did not have the trust of the states, requiring as it did the surrender of their fiscal powers.
The Centre showed remarkable maturity in willing to take the revenue risk and guaranteeing to the states any possible consequential shortfall for five years by incorporating the assurance in the constitutional amendment itself. This, in a microcosm, is the story of GST– the many concessions which the Centre and the states have been willing to give in order to get GST up and going, to ensure it works.
While two years may be too short a time to critically appraise a sweeping fiscal reform of this nature, the fact remains that it has more than lived up to its promise.
It has reduced the cascading effect of taxes, cut down compliance, logistics and transportation costs, given India a common economic market, and provided a technology driven tax system— in short, truly created one nation, one tax, one market.
It has resulted in the creation of a unique body, the GST Council. Enshrined in the constitution, the GST Council is an embodiment of pooled sovereignty, of cooperative federalism, and an outstanding success. It helped that the chair of the GST Council in the formative period was a Union finance minister who showed patience, economic acumen and political awareness. The GST Council has been responsive — a fault, if at all, being that it has been too much so.
Going forward, the Centre should not put too much burden of revenue on GST but focus on ensuring compliance becomes easy. Revenue growth will be a natural corollary. GSTN, the technology network, has a key role to play. While technical glitches are bound to happen, they should be urgently corrected. Input tax credit, the basic premise of GST, has an inbuilt compliance incentive.
The producer who has paid tax on his inputs is keen to collect taxes from his buyer, so that he can get credit input tax paid against the tax he collects. This being so, decisions of the type where rates are pegged lower without the benefit of input tax credit run counter to this fundamental premise and should be avoided.
The coverage of GST should increase. The inclusion of petroleum products as well as real estate, which remain a potent source of unaccounted money, and electricity, will cut down costs, expand the formal economy and make GST more complete.
Ultimately, the success of any tax policy depends on how it’s administered. Despite dual administration, GST has not been reduced to tax anarchy. The Centre deserves credit for making the Central Board of Indirect Taxes and Customs (CBIC) the single point for issue of clarifications.
A perennial area of concern in any tax administration is dispute resolution — it has to be timebound, consistent with the law and with clear channels of appeal. Policymakers will have to monitor this closely and ensure uniformity in decision-making. Micro, small and medium enterprises (MSMEs) and the export sector will continue to need a benign eye.
The Centre should not succumb to demands of reduction in tax rates — there are other ways to address sectoral infirmities. The ultimate aim should be a convergence of rates and reduction in the number of slabs, which will happen with passage of time.
The National Democratic Alliance (NDA) has bucked the global trend of governments that had ushered in GST losing the next immediate election. GST is here to stay. July1, 2019, is indeed a cause for celebration.
(Najib Shah is retired chairman of the Central Board of Indirect Taxes and Customs)