Home >Opinion >Views >Opinion | It’s about time that government fixes loopholes in GST regime
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Photo: iStock

Opinion | It’s about time that government fixes loopholes in GST regime

  • Any new reformative measure comes with its bag of teething issues. In case of the revolutionary GST reform has India overcome the initial problems or is fine tuning still required?

Goods and Services tax (GST), implemented in 2017, aimed at moving India into the next phase of economic growth and showcased to the world that the country is serious in taking bold reformative fiscal steps. ‘One nation one tax’, it has led to an efficient tax collection system, minimising revenue leakages and enabling easy inter-state movement of products. Post the lockdown announced in March 2020, October 2020 was the first month which witnessed GST surpassing 1.05 lakh crore, the highest recorded since February 2020.

Source : http://gstcouncil.gov.in/gst-revenue
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Source : http://gstcouncil.gov.in/gst-revenue

However, the key point that needs to be addressed now is: Any new reformative measure comes with its bag of teething issues. In case of the revolutionary GST reform has India overcome the initial problems or is fine tuning still required? The enacted GST structure does have its loopholes and it is time that the Government focused on them and bridged the gaps.

Countries such as Canada and Brazil have a dual GST structure in place, a model which India chose to adopt. While India has a four slab GST structure in place, international best practices show that maximum countries have a single slab and 28 countries worldwide have dual slab. The current practice of four GST slabs provides ample scope for vested interests to lobby their case with political bosses and bureaucrats thus undoing the very objective of transparency. Were these changes permitted due to and are they an outcome of the compromise that the Central Government had to make as they had to take State Governments on board is a question that we need to answer?

The rationale behind four tax slabs is that products of necessity and luxury cannot be bucketed together as it would have an adverse impact on the welfare of the common man. On the flip side, do we need four tax slabs or as the Niti Aayog in 2019 has recommended two tax slabs would work well. Former Finance Minister, Late Mr. Arun Jaitley who had spearheaded the GST negotiations with the States, was also of the view that two tax slabs would ensure that common man’s products are not taxed exorbitantly while the products easily afforded by the affluent class could be taxed at a higher rate.

Another interesting point of debate has been that products such as alcohol, petrol, diesel etc have been kept outside the ambit of GST. The reasoning being given was that neither the Central or the State Governments were in favour of a heavy revenue loss. Centre and States are reluctant to give up a revenue tool to meet any contingency situation. Inspite of declining crude oil prices during the pandemic, the benefit was not passed on to the consumer, it had been retained by the Government to strengthen their fiscal position.

In the current scenario, the total tax incidence as of date on petrol is on an average 45-50% and on diesel 35-40%. Being the devil’s advocate, if petrol and diesel were to be brought within the purview of the GST structure, prices of these two products would drastically decline leading to higher demand and fueling up consumption of the same. This would lead to increased tax collections from the very same two products and higher profit margins for the oil marketing companies. The negative impact of lower taxes on petrol and diesel could be further netted out by increased corporate tax collections from the two goods and increased dividends being paid out by the PSUs to the Government. A win-win solution for both consumers and Government with scope for substantial political dividend. Is this a thought worth contemplating, is something that the Government needs to brainstorm on?

It’s worth mentioning here that the GST council has been closely observing the implementation of GST on a regular basis, and has been consistently taking inputs from the industry. However, on the contrary, with three years being completed since GST saw the light of the day, are regular meetings of the GST council still needed? Isn’t it time that the Government ensures that the structure is robust and lets it function on its own. Instead of deliberating on transitionary issues relating to implementation of GST the Council focuses on reshuffling of products under different slabs which puts a question mark on the transparency aspect.

Frequent requests for reduction in the rates and the tendency of all sectors to petition for lower rates adds to the political drama around it. The focus should now be increase in collection of GST rather than repeatedly tinkering with rates. Apart from providing scope to confusions due to repeated changes, regular interventions by the Government raises the scope of lobbyists and influencers having their say and impressing their thoughts upon the Government, thereby defeating the purpose of the tax reform of bringing in transparency, reducing scope for manipulation and minimising corruption in the system.

Jagadish Shettigar is a professor and Pooja Misra is an associate professor of economics, Birla Institute of Management Technology, Greater Noida. Views expressed are their own.

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