GST has been a win-win taxation regime for the Centre and states
4 min read 13 Feb 2022, 10:16 PM ISTCritics of GST must acknowledge that it hasn’t reduced revenues and its adoption represents an advance over the old system
PremiumRecently, my attention was drawn to an article by V. Anantha Nageswaran, who is now India’s chief economic advisor. The article was being criticized by the finance minister of a state who had shared some data to substantiate his assertion.
The assertion of the state finance minister was that the state’s own tax revenues (SOTR) were growing faster prior to the 2017 implementation of the goods and services tax (GST), while Nageswaran’s article had claimed that GST had led to a faster increase in revenues for states such as Tamil Nadu than the sales tax which was collected earlier.
The data shared by the minister does not provide counter-evidence to the argument made by Nageswaran, as it compared Tamil Nadu’s SOTR, which is not the same as the sales tax revenue that Nageswaran was referring to. Definitions do play a key role in such comparisons, and ideally one would have liked an apples-to-apples comparison. The definitional issue is also important because SOTR includes excise duty on alcohol and value-added tax on petrol and diesel, which are critical for revenues but have nothing to do with the GST.
Moreover, even by the figures presented by the minister, the growth rate of SOTR was 3.46% in 2014, 6.7% in 2015 and 2.31% in 2016. According to him, the growth rates were 6.79% in 2017, 9.07% in 2018 and 12.59% in 2019. Therefore, even when we compare the two, we see that the growth rate is higher in the three years after the introduction of GST than the three years prior. Moreover, it does not make economic sense to arbitrarily pick random years and present their compounded annual growth rate (CAGR) to present an argument without putting into context the prevalent macroeconomic situation.
There is another important point here that pertains to the rate of inflation and nominal growth rates. Taxes are levied on the value of goods and services, which makes prices important. High inflation years typically lead to higher revenue mobilization. Since 2013, India’s inflation has moderated from double-digit rates to 4-5%. This moderation in inflation, and thus nominal growth rates, has also meant that tax revenues would grow slower than in the past. Low inflation, high real growth and modest tax growth is good for macroeconomic stability. States, thus, would have been expected to adjust to this reality. When one considers this structural change in the economy, then the revenue growth of GST is significantly better than what was experienced previously.
Additionally, the figures cited did not include the compensation provided to states by the central government. While introducing GST, the central government assured a 14% annual revenue growth to states and promised to compensate them in the event of a shortfall. This 14% was arrived based on the revenue growth rates in the preceding years, which had experienced higher inflation. Consequently, as inflation moderated, so did the revenue mop-up, which resulted in the Union government compensating states as decided under their agreement. This did impose a cost on the Centre, but states have benefited immensely because of the guarantee given by it. In the absence of GST and such a guarantee, revenues for most states would have grown but at a slower pace than of the present GST revenue mop-up. This would have been more problematic during the pandemic, when most states introduced lockdown-like restrictions at some point or the other and were yet assured of their revenues simply because of the Centre’s commitment to state governments.
But it is also important to discuss the commitment of various state governments to GST. This, in terms of the lack of caution shown while implementing ad hoc restrictions on economic activity from time to time, or towards improving compliance in their respective states. The tax is the responsibility of the GST Council, not the central government, and the Council comprises the finance ministers of states. But have state finance ministers initiated any conversation about the simplification or rationalization of GST rates?
Various interventions by different state finance ministers have resulted in the weighted average rate falling to about 11%, even though the revenue- neutral rate was 15%. Moreover, these interventions have added way too many exemptions, and we have close to nine effective GST rates, among other things, which have only added to the complexity of this taxation structure. In a joint paper with India’s former chief economic advisor Arvind Virmani (bit.ly/3svqI6Z), we had extensively reviewed GST to document these issues and propose simplification so as to further build on the gains derived from the implementation of GST.
Despite the complexities that exist, revenue gains have started to accrue, as GST represents an improvement over the older taxation system, which had its own share of problems. Now that the gains from GST—both in terms of revenues for governments and efficiency for businesses—have started to show, it would be wise not to politicize the new tax regime’s success.
After all, the success of GST is the success of the GST Council, and all finance ministers should share credit for it.
Karan Bhasin is a New York-based economist
