Goods and Services Tax (GST): A Brief Background
The 101st Amendment to the Constitution of India introduced a nationwide GST, the biggest indirect tax reform in the country, on July 1, 2017. It is a destination-based consumption tax, i.e., it would accrue to the state or the union territory where the consumption takes place. It would be a dual tax with the Centre and the states simultaneously levying tax on a common tax base. When the supply of goods and services takes place within a state, i.e., intra-state transactions, such transactions will attract both central GST (CGST) and state GST (SGST). The GST to be levied by the Centre on inter-state supply of goods and services called the integrated GST (IGST). Similar to how SGST is levied by the state governments on the intra-state supply of goods and services, union territories (UTs) levy tax on intra-union territory supply of goods and services called the UTGST, which is levied along with CGST. In order to implement the GST, the GST Council was established as a constitutional body through The Constitution (101st Amendment) Act, 2016 to decide issues relating to the GST. As per Article 279A of the amended Constitution, the GST Council would be a joint forum of the Centre and the states with the union finance minister as its chairperson and the minister in-charge of finance or taxation or any other minister nominated by each state government as its members. The union minister of state in-charge of revenue or finance would also be a member of the council. The mechanism of the GST council is to ensure harmonisation of different aspects of the GST between the Centre and the states as well as among the states.
Current Structure of GST
There are four standard rates of GST in the country as of now. Around 1,300 goods and 500 services fall under the four GST slabs of 5 per cent, 12 per cent, 18 per cent, and 28 per cent. There are several goods and services under the exempt category, i.e., those which do not attract any GST (zero per cent). There is a special rate of 0.25 per cent and 3 per cent GST for precious/semi-precious stones and precious metals (gold/silver), respectively. The GST would apply to all goods other than alcoholic liquor for human consumption and five petroleum products, viz., petroleum crude, motor spirit (petrol), high speed diesel, natural gas, and aviation turbine fuel (ATF). There is also a compensation cess, ranging from 1 per cent to 290 per cent, levied on luxury and demerit goods such as automobiles, tobacco, aerated drinks, etc., over and above the topmost rate of 28 per cent.
Effectively, what we have today is a seven-tax slab GST structure, making it too complicated and also less effective when it comes to the quantum of revenue collections from GST.
Shortfall in Revenue Collections from GST
Concerns about revenue collections from GST have been plaguing the GST Council for a while now. A slowdown in revenue collection was visible even before the COVID-19 pandemic broke out. The pandemic had a huge impact on the GST revenues as economic activities were severely disrupted. A number of other factors have been at play, including rationalisation of tax rates on many items over time, poor compliance, and the issue of guaranteed compensation to states from the Centre in case of revenue shortfall, among others. For example, when the GST was implemented in 2017, there were over 200 items in the 28 per cent tax slab. Subsequently, tax rates on many of these items were slashed. Currently, there are only 37 categories of items in the 28 per cent slab of GST.
As a result, the union government failed to collect as much revenue from GST as it expected and had to continuously cut down its budget expectations. In the financial year (FY) 2018–19, the union government had budgeted for Rs 7.43 lakh crore target from GST revenue (in Centre’s kitty) which was revised to Rs 6,43,900 crore. In FY 2019–20, the union government had a moderate target of Rs 6.63 lakh crore, but collected only Rs 5.99 lakh crore. In the FY 2020–21, the net GST collection of Centre was Rs 5.48 lakh crore though the revised estimate (RE) for 2020–21 was targeted at Rs 5.15 lakh crore. For the FY 2021–22, the union government has set a target of Rs 6.30 lakh crore from GST. In one of its reports, the 15th Finance Commission (FFC) noted, “The available numbers indicate that GST buoyancy during 2017–2020 was less than that of subsumed taxes during 2011–2017.”
The lower-than-expected GST revenue buoyancy (revenue buoyancy is defined as the efficiency of any tax system, GST in this case, in terms of revenue mobilisation) and the slipping of the revenue neutral rate under GST raises concerns regarding the sustenance of the revenue trend going ahead. This concern is all the more valid given the fact that the legally mandated compensation to states for revenue shortfall from the GST implementation comes to an end in June 2022.
While addressing the press after the 45th GST Council meeting in Lucknow on September 17, 2021, the union finance and corporate affairs minister, Nirmala Sitharaman, said that the Revenue Neutral Rate prescribed at the time of implementation of GST was 15.5 per cent. The 13th Finance Commission defined revenue neutral rate as follows: “Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST, that is, it should be a ‘revenue neutral rate’ or RNR”. But the weighted average GST rate currently is only 11.6 per cent. In its analysis in 2019, the Reserve Bank of India (RBI) also noted that since the rollout of GST, the frequent rate changes (GST rate rationalisation) had brought down the tax incidence to 11.6 per cent then. Later amidst public outcry over ‘high’ GST rates, the government had to further reduce rates. In the words of the finance minister, “the revenue neutral rate of 15.5 per cent coming down to 11.6 per cent is because, of course, the council in its wisdom probably over the years had reduced the rate of many many items and not just the reduction, but the resultant refund due to the inversion have resulted, net net, in the collection coming down from the revenue neutral levels. As a result, we feel that the overall collection has come down. We also feel why it has come down. But if we all put together we can all see that we are far below the revenue neutral rate.”
Review of GST Regime: Formation of GoM on GST Rate Rationalisation
In its 45th meeting held in Lucknow, the GST Council deliberated upon the revenue situation and the revenue neutral rate having fallen to 11.6 per cent from 15.5 per cent and announced the formation of two groups of ministers (GoM) to review various aspects of the indirect tax regime. On September 24, 2021, the union government issued orders for the incorporation of both panels. One panel is concerned with rationalisation of rates and another is to discuss ways and means of using technology to further improve compliance including monitoring through improved e-way bill systems, e-invoices, FASTag data, and strengthening the institutional mechanism for the sharing of intelligence and coordinated enforcement actions by the Centre and the states.
The GoM on rate rationalisation shall–
- review the supply of goods and services exempt under GST with an objective to expand the tax base and eliminate the breaking of input tax credit (ITC) chain.
- review the inverted duty structure and recommend measures to eliminate the inverted duty structure.
- review the current tax slab rates and recommend changes in the same as may be needed to garner required resources.
- review the current rate slab structure of GST, including special rates, and recommend rationalisation measures, including merger of tax slab rates, required for a simpler rate structure in GST.
The GoM may suggest changes that may be implemented immediately and the roadmap for the implementation of the changes that should be implemented in the short and medium term. The GoM is to submit its report in two months.
The GoM shall be a seven-member group consisting of Karnataka chief minister, Basavaraj S. Bommai, as the convener and members including West Bengal finance minister Amit Mitra, Kerala’s finance minister K.N. Balagopal and GST Council members from Bihar, Rajasthan, Goa, and Uttar Pradesh.
The incorporation of the GoM panel on rate rationalisation marks the first steps taken by the government towards an overhaul of the multiple tax rates under the indirect tax regime to augment revenue.
Need for Course Correction on GST
In its report, tabled in Parliament in November 2020, the FFC urged restoring the rate neutrality of GST (revenue neutral rate), which was compromised by rate cuts. “Restoring revenue-neutral rates will mean merging the rates of 12 per cent and 18 per cent and operating with a three-rate structure of a merit rate, a standard rate, and a demerit rate of around 28 per cent to 30 per cent and minimising (tax) exemptions,” said the FFC report, which recommended the ways of sharing Centre’s tax revenue with states for 2021–26.
The rationalisation of the GST structure into three slabs by merging two existing slabs of 12 per cent and 18 per cent has been in discussion for several years. The three-rate structure is definitely important as the streamlining of the GST rate structure will greatly help move towards its revenue potential. According to industry chamber PHDCCI, the rationalisation of GST rates will increase consumption and tax revenue, reduce compliances, reduce tax evasion, and help to make GST as a good and simple tax, as simplified tax regime is the need of the hour to reduce litigation pertaining to tax matters. This will also lead to removal of hardships and provide ease of doing business and compliance among taxpayers.
Any such recommendation of change in rates or tax slabs of GST by the GoM would then require final approval of the GST Council.
Way Forward
An ideal taxation system is one that is efficient, i.e., one which can generate the greatest amount of tax revenues with the least possible costs or economic distortions. A simpler GST would not just be more efficient but it would also benefit businesses, thereby leading to several efficiency gains for the government as well as increase in revenue collections for the exchequer.
© Spectrum Books Pvt Ltd.