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Home / Opinion / Views /  GST was put to the test by economic stress, it has come out stronger

The Goods and Services Tax (GST) has completed its 5th year today since its inception on 1 July 2017. The move towards ‘one nation one tax’ was one of the most historic indirect tax reforms India had ever undertaken. After concerted efforts of consensus building for over a decade, GST replaced 17 central and state taxes and 13 cesses, eliminating the cascading impact of indirect taxation and laying the foundation for a common national market. 

Earlier, our indirect tax regime was based on origin and was inefficient, as it resulted in high costs accruing to the economy. Every state was, in fact, a distinct market for businesses as well as consumers. Many industries were uncompetitive under the old tax regime, and it altered choices of factory or warehouse location that should be determined by purely business considerations. As per an estimate by the Federation of Indian Chambers of Commerce & Industry (Ficci), the overall tax burden on goods ranged between 25% and 30% prior to GST.

Some consider the new GST regime complex with its high and multiple tax rates. This was widely debated, and the GST Council considered two essential factors before arriving at a 5-tier rate structure. First was the principle of equivalence, where all items fit into rate slots nearest to the prevailing aggregate duty rates of all indirect taxes. Second, to safeguard the poor from inflationary pressure, items with 60% weight in the Consumer Price Index (CPI) were exempted from GST, while another 15% were subject to just a 5% levy. 

The proportion of the taxable value of goods and services covered under the lowest bracket of the ‘nil’ tax rate has gone up from 9% in 2017-18 to nearly 17% in 2019-20, and that in the highest GST bracket of 28% is estimated to have been brought down from 12% to 7.6% in 2019-20. Consequently, the effective GST rate had come down from 14.4% at inception to 11.6% in 2019. However, despite this and the pandemic’s disruption, the GST-to-GDP ratio went up from 5.8% in 2020-21 to 6.4% in 2021-22, reflecting improved compliance. With better compliance, a complaint-redressal mechanism (a GST Tribunal) will be both timely and fair.

To protect the interests of the Micro, Small and Medium Enterprises (SME) sector, the government has taken a series of initiatives in the form of enhanced threshold exemptions from GST registration, return filing and audits, quarterly filing of GST returns for taxpayers with an annual turnover of 5 crore, exemption from GST payment at the time of receipt of advances on account of the supply of goods, and a composition levy scheme, among others. For small taxpayers, the number of return filings in a year has dropped sharply from 24 to only eight now. In fact, GST has opened new avenues for MSMEs through GST-based bill discounting and collateral-free access to credit. 

The federal nature of the GST regime was on display during the pandemic. In 2020-21, the revenue from State GST (or SGST) declined due to economic contraction. However, given the compensation paid to states and the arrangement of back-to-back loans, overall GST revenues for states stood at 7.69 trillion in 2020-21 (including back-to-back loans and compensation cess), versus 6.86 trillion in 2019-20. That was a growth rate of 12.1% in a covid-affected year. With revenues from SGST rising to 8.68 trillion in 2021-22, this growth was 12.9%. These back-to-back loans would be extinguished through the extension of the compensation cess beyond its initial sunset of June 2022.

In the pre-GST era, Indian states would have had no recourse to compensation cess, nor could they have contemplated augmenting their revenues through fresh and/or higher levies during a pandemic. Overall, in the five years (2017-18 to 2021-22) since the introduction of GST, the overall resource growth for states was 14.8% per annum, versus an annual average growth rate of 9% between 2012 and 2015. Clearly, states are better off than they were before GST was introduced. So, a young tax regime was put to a test by a period of high economic and human stress, and it proved its usefulness to India’s public finances. 

All indirect taxes, by their very nature, are regressive. Subjecting only value addition to taxation mitigates their regressive nature. But a vast number of exemptions means that there is no input tax credit to claim by many taxpayers; it also means a smaller tax base, forcing a few items to bear the burden of offsetting the exemptions given to a large number. Similarly, rates without input tax credit also accentuate the regressive nature of the tax. Therefore, from an economic efficiency angle, the current rate structure is a work-in-progress. The recently concluded GST Council meeting has moved to address some of these issues, and that is good news.

Finally, one area in which the GST regime can play a role has nothing to do with taxation at all. It is about the rich data that it possesses, which can offer very useful and penetrating insights into the health of the economy and trends in economic activity from a cyclical perspective too. It can help us track the formalization of the economy and the transformation of the MSME sector. It can help us understand districts and sectors where economic activity is thriving or lagging, and decide on what to do about it, if anything.

Therefore, on its fifth anniversary, the GST Network can contribute immensely to public policymaking, more than it already has, by opening up its data, even while respecting privacy and security considerations. Thus, GST would make an ongoing contribution to sound public finances, but also sound policymaking by the Union and state governments, in the true spirit of federalism.

V. Anantha Nageswaran is chief economic advisor to the Government of India

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