Five years of GST: Mistakes that have made the regime a disappointment

Addressing mistakes made while introducing the tax and getting back to a revenue-neutral rate(s) constitute the agenda that awaits attention

Let’s start with the conclusion: The goods and services tax (GST) in India, now five years old, has not been the success it was intended to be. Nor has it been a failure — as happened in Malaysia, which tried the tax for three years before dumping it. Like much of what the government tries to do, the GST has its plus and minus points, with the prospect that the minus points can be progressively eliminated.

Could it have been handled better? Yes, starting with avoiding the initial tech glitches and the complications of multiple filing. Are all the problems associated with it about to be resolved? Not yet. Has it worked out to be a case of constructive federalism? For the most part, but states are unhappier than the Centre. In short, it has been the usual mixed bag. Can we or should we roll it back? Certainly not. The task therefore is to build on the foundation that has been laid.

To understand that conclusion, start with two of the primary assertions or assumptions made about the tax: That it would raise the tax-GDP ratio, and (over and above that) provide a boost to GDP. While judgements must be qualified because of the intervening pandemic, the expectation is that GDP this year (at current prices) will be over 70 per cent bigger than in the pre-GST year of 2016-17. Has revenue grown at a faster rate?

If collections average Rs 1.3 trillion monthly in 2022-23, against an initial monthly collection assumed in 2017 of about Rs 0.9 trillion (ie, assumed growth of 45 per cent), it is clear that GST revenue has fallen short of the anticipated GDP growth of about 70 per cent. Indeed, it had been assumed that revenue would grow at an annual rate of 14 per cent (the rate guaranteed to states). This has manifestly not happened — partly because rates were slashed in the run-up to the 2019 election and therefore were no longer “revenue-neutral”. Whatever the reason, revenue from the tax has disappointed.

The second promise or assumption was that GST would boost GDP growth. Here the intervening pandemic makes judgement difficult. Still, we know that in the three post-GST years (2017-20) before the pandemic hit, economic growth had slowed to an annual average of 5.7 per cent, down from 7.9 per cent in the three pre-GST years of 2014-17. Crucially, we don’t know the counter-factual (would the slowdown have been more pronounced without GST?). But given that the introduction of GST disrupted many businesses, a qualified judgement would be that GST did not help to boost GDP.

Two other claims were made for GST: That it would be a “good” and “simple” tax. Focusing on simplicity first, everyone knows that tax-payers have struggled with the demands of GST compliance and form-filling, complicated further by the multiple and repeatedly modified rates of tax. But this burden has been progressively lightened.

As for being “good”, fiscal theory prescribes many tests which in principle GST meets. In practice, let us interpret it as meaning improved compliance, and therefore reduced evasion. The notable fact here is that GST registrations have more than doubled to 13.5 million, from 6.4 million prevailing before GST. Compare this also with the 16.5 million establishments that existed in India in 2013-14 (according to the sixth economic census) and that had at least one hired worker. This is impressive, but it does not mean that everyone is paying what is due. You can walk into any market in India, or talk to any small-time works contractor, and be offered a bill or invoice with GST and one without. Also, fake invoicing abounds, for claiming tax credits.

Clearly, there is widespread evasion – although a value-added tax like GST, being multi-point, is supposed to make evasion more difficult. As with demonetisation, the Indian businessman has shown himself creative in all the wrong ways, facilitated by the large presence of the unorganised or quasi-organised sector, which when GST was introduced accounted for half of GDP. Some claims have been made that the unorganised sector has shrunk since because of the damage to small businesses caused by the pandemic, the spread of digitalisation, and GST itself. Such claims sound plausible, but await validation. Meanwhile, recent efforts to detect evasion have borne some fruit.

There is no space here to deal with the mistakes made when introducing the tax, principally the multiple rates, the inverse ratio between rates on intermediate and final goods which created the room for excessive input credits (refund claims), the crippling of the reverse charge mechanism to bring more players/transactions into the tax net, the absence of incentive for states to maximise revenue because of the compensation guarantee, and conversely the unhappiness among states because the compensation mechanism has run its course. Addressing these and getting back to a revenue-neutral rate(s) constitute the agenda that awaits attention. Until now the failures in implementation have made the tax a disappointment.