Analysis of GST regime in India – Explained, Pointwise

Introduction

The GST Council was mandated to meet at least once every quarter, but due to the pandemic, the council had not met for two quarters. Recently the government announced the 43rd meeting of the Goods and Services Tax (GST) Council on May 28. There are many issues in front of the council such as controlling petrol price rise, reducing GST levies on critical COVID-19 supplies and vaccines, etc. But apart from these, there are many fundamental issues surrounding the GST regime in India.

States are dependent on GST collections for nearly half of their tax revenues. 14 states requested help from the Center to manage their finances during the pandemic. On the other hand, the central government imposed various cesses such as cess on exports, health, and education, etc. As the Center does not want to share them with the States. In this article, we will analyse the impact of GST regime in India.

A brief about GST Regime in India
  • Goods and Services Tax(GST) is a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services throughout India. It replaced the existing taxes levied by the central and state governments. It is a single indirect tax for the whole nation, which made India one unified common market.
  • Likewise, it is a destination-based tax applied on goods and services at the place where final/actual consumption happens.
  • GST is applied to all goods other than crude petroleum, motor spirit, diesel, aviation turbine fuel, and natural gas and alcohol for human consumption.
  • There are four slabs for taxes for both goods and services- 5%, 12%, 18%, and 28%.
  • Although GST aimed at levying a uniform tax rate on all products and services, four different tax slabs were introduced because daily necessities could not be subject to the same rate as luxury items.
About GST Council
  • GST Council is the most important part of India’s GST regime. The council is responsible for recommending rates of tax, period of levy of additional tax, principles of supply, the threshold for exemption, floor level and bands of taxation rate, special provisions to certain states, etc.
  • Article 279A of the constitution enables the formation of the GST Council by the President to administer & govern GST. The Union Finance Minister of India is a Chairman of the GST Council. Ministers nominated by the state governments are members of the GST Council.
  • The council is devised in such a way that the center has 1/3rd voting power and the states have 2/3rd.
  • The decisions are taken by the 3/4th majority.
  • A mechanism for resolving disputes arising out of its recommendations also decided by the Council itself.
Achievements of GST regime in India
  1. Expansion of Tax Net: The number of registered taxpayers at the time when the GST was rolled out was Rs 65 lakhs. But as of March 2020, there were 1.23 crore active GST registrations. This indicates a significant increase in tax base and a change in taxpayers’ compliance behavior. Apart from that, the GST regime also brought a cash-driven informal economy into the tax net.
  2. Revenue collections: In 2018-19, the average monthly collection was Rs 97,100 crore with collections breaching Rs 1 lakh crore regularly. In 2019-20, it reached INR 12.2 lakh crore.
  3. Introduction of e-way bill system: Apart from few initial technical glitches, the e-way bill system has been largely streamlined. The total number of e-way bills (inter-state as well as intra-state) generated during Financial Year(FY) 20 were approximately 63 Crore. This is 13% growth when compared to FY-19(Approx 56 Crore).
  4. Rate rationalisation: In 2017, nearly 19 percent of items were under the 28 percent GST rate. But currently only 3 percent of the items subject to the 28 percent GST rate.
  5. Legislative amendments and clarifications: The GST law has undergone significant changes since its inception on 1 July 2017. Within 3 years, there were almost 700 notifications, 145 circulars, and over 30 orders issued by GST Council. These aimed to address taxpayers’ demand and to carry out procedural simplifications and curb tax evasion.
  6. Center-State Relations: Since most decisions in the GST council have been unanimous this shows a better Co-operative Federalism in India.
  7. Reduced Interface With Tax Officials: Within a year about 12 crore returns have been filed, and 380 crore invoices have been processed by the GST Network (the IT backbone for taxpayers to pay tax, file returns, and claim refunds). This reduced the user’s interface with a tax official.
  8. Reduction in turnaround time: The turnaround time for transportation of goods has come down with the dismantling of barriers and check posts on state borders. This is gradually leading to the emergence of a truly national market.
Issues in GST Regime in India

The 15th Finance Commission report formally acknowledges that the GST regime in India is an economic failure that did not deliver on its early promises.

  1. Multiple Tax Rates: Unlike many other economies which have implemented this tax regime, India has multiple tax rates. This hampers the progress of a single indirect tax rate for all the goods and services in the country.
  2. New Cesses crop up: While GST scrapped multiplicity of taxes and cesses, a new levy in the form of compensation cess was introduced for luxury and sin goods. This was later expanded to include automobiles.
  3. Economy Outside GST purview: Nearly half the economy remains outside GST. E.g. petroleum, real estate, electricity duties remain outside GST purview.
  4. The complexity of tax filings: The GST legislation requires the filing of the GST annual returns by specified categories of taxpayers along with a GST audit. But, filing annual returns is a complex and confusing one for the taxpayers. Apart from that, the annual filing also includes many details that are waived in the monthly and quarterly filings.
  5. Higher tax rates: Though rates are rationalised, there is still 50 percent of items are under the 18 percent bracket. Apart from that, there are certain essential items to tackle the pandemic that was also taxed higher. For example, the 12% tax on oxygen concentrators, 5% on vaccines, and on relief supplies from abroad
Erosion of ‘trust’ and ‘trustworthiness’ 

Recently the GST Compensation issue between the Center and the State led to decreasing trust in the center by some states. Apart from that, the other issues eroding the Co-operative federalism are,

  • End of revenue guarantee: During the enactment of GST, the Center promised compensation for loss of revenue faced by states. This revenue guarantee ends in July 2022. Citing the pandemic, some states are demanding more compensation time
  • Loss of fiscal autonomy of states: States surrendered the majority of their indirect taxation powers for the implementation of GST. At present, States have no taxation powers over them. But the GST revenues are uncertain, and the States also do not witness on the ground.
  • The issue of Pandemic: The second wave of Covid-19 infections put greater onus on the States. Such as mobility restrictions, vaccination sequencing, and even procurement of Vaccines. With less tax revenue on hand, the States cannot meet all the needs to tackle the pandemic.
Suggestions to improve the GST regime in India
  1. Expansion Of Tax Base: There are many goods that are still outside the GST net and hamper the seamless flow of input tax credit. Key items outside its ambit are electricity, alcohol, petroleum goods, and real estate. Among fuels, it may be possible to bring natural gas and aviation fuel within GST. Also, the government in the upcoming meeting can reduce the GST on essential items such as oxygen concentrators, vaccines, etc to overcome the pandemic.
  2. Infusing tax predictability: The GST Council can adjust the rates only once a year. Further, the Center shouldn’t bypass GST by introducing any Cess. The Center can also rationalise the present Cess ecosystem in India to a bare minimum. This will ensure tax predictability to states and enhance the ease of doing business.
  3. More accommodative approach from the Center: To prevent an irretrievable breakdown during the pandemic the Center has to be more accommodative to State’s needs. Such as, allocating State’s share properly, procuring vaccines from abroad, etc. This will further enhance State’s reliability on GST.
Conclusion

GST is a positive step towards shifting the Indian economy from the informal to the formal one. But, the Center and States have to understand the limitations associated with Indirect Taxes and move towards the inclusion of people into the Direct tax bracket. But, to revive GST Regime back on track India needs some radical steps such as an extension of revenue guarantee to States, restricting cesses, above all respecting the need of State governments fiscal problems.

 

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