GST reform just a first step to making it good and simple

THE overhauling of the Goods and Services Tax (GST) after a lag of eight years is a welcome reform. The only fault in the exercise is that it has been delayed too long. The GST system has been in dire need of simplification and rationalisation. Originally conceived as a single tax that would replace the multiplicity of levies comprising the indirect revenue structure, it ended up becoming a tangle of red tape.

While the GST collections have been increasingly buoyant over the years, there has been an equally rapid rise in complaints by small and medium enterprises over harassment by zealous tax authorities.

Disputes over minute issues arising from the complexity of the tax structure should be dealt with as minor economic offences rather than as criminal acts. One can only hope that the current restructuring will also ensure an end to the harassment of trade and industry.

The big bang reform this time is the reduction of tax slabs from the original four – 28, 18, 12 and 5 per cent, respectively – to only two – 18 and 5 per cent. This is expected to shrink the revenue collections by as much as Rs 48,000 crore annually. The hope is that the cuts will spur consumption sufficiently to launch a virtuous cycle of higher production and investments.

There is no doubt this will stimulate the economy. The only question is: to what extent, and whether this will be sufficient to make up the revenue shortfall to Centre and states.

State governments, whether helmed by the BJP or other parties, are naturally apprehensive over the prospect of reduced finances despite having voted unanimously for the measures in the GST Council. But the political gains from supporting price cuts on virtually the entire range of essential goods has not escaped their notice.

Despite the potential revenue loss, cutting the number of tax slabs makes eminent sense. The 28 per cent slab should not have been created in the first place even as having four tax rates created enormous complexity. Even now, a punitive 40 per cent rate has been created for so-called “sin" goods. So, effectively there are still three tax slabs.

There are also multiple versions of GST. There is integrated GST on inter-state supplies of goods and services, and there is central, state and union territory GST, imposed on intra-state supplies.

Till now, there has also been a compensation cess meant to cushion states from the loss of revenues, having sacrificed their own levies in favour of this tax. Fortunately, this is now being done away with in the next few months.

The imposition of GST on health and life insurance should also not have been introduced in the first place. Given the need to expand the insurance coverage throughout the country, this should not have been chosen as an avenue to raise revenue. With private healthcare costs rising rapidly, insurance is the only way to shield those at the bottom of the pyramid from crippling medical expenses.

On the other hand, one of the big positives in the entire exercise is the effort to reduce the inverted duty structure created in many sectors. An inverted duty means that raw materials or inputs are taxed at a higher rate than the finished product. It has been corrected, for instance, in the textile sector with manmade fibre and yarn being brought down from 18 and 12 per cent, respectively, to a uniform 5 per cent.

On the other hand, anomalies remain, with steel being taxed at 18 per cent while many finished products are at the lower 5 per cent.

The inverted duty structure creates huge complications for business as they pay greater tax on inputs than is being collected from the output. The tax authorities must iron out all these wrinkles and ensure there is genuine ease of doing business.

The classification of goods, which had created multiple disputes and sparked prolonged litigation, has now thankfully also been eased to a great extent. By placing the entire category of food into the lowest 5 per cent slab, it no longer matters whether popcorn is sold in the salted, caramel, packaged or loose versions. Similarly, other classifications have been made much broader, making compliance easier.

The next step being talked about is whether trade and industry will pass on the benefits of the tax cuts to consumers. This is not an issue that should be considered as another way to penalise trade and industry. Business associations have already pointed out the process of shifting to the new system will not be an easy one.

It is for revenue agencies to help enterprises to make the shift a relatively painless one, rather than adopt a punitive approach. There are bound to be some enterprises seeking to defraud consumers, but the fact that tax rates have been brought down has been widely publicised, ensuring that the general public is educated well on the issue.

The revenue authorities should, thus, direct their energies towards assisting the majority of businesses moving towards the new system rather than trying to focus on the minority seeking to evade compliance.

While this major step towards GST reform is commendable, it must be viewed as the first in a process towards creating a simpler and effective tax. It must not be forgotten that the original concept of a single levy was expected to raise GDP growth considerably here as it had done elsewhere. It has so far been adopted in 140 countries, where revenues have risen along with GDP.

The National Council of Applied Economic Research had done a study prior to the GST implementation, projecting it would raise India’s economic growth by 0.9 to 1.7 percentage points, assuming that it would be a single tax.

With multiple tax rates and cumbersome systems, it is far from the original objective. The task must now be to make it simpler and easier to use so that it truly becomes the long awaited Good and Simple Tax.

Sushma Ramachandran is a senior financial journalist.

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