GST: More than just a tax reform

The goods and services tax (GST) journey so far has been a challenging one. There have been technical glitches in the GST network (GSTN) platform, there was hesitancy among the small entities to register and file tax returns, and there was also the difficult task of coordination between the Centre and state GST officers at the field level. But at the end of five years what has come out clearly is the robust design of the GST system — the integration of the entire value chain from raw material to retail for the purpose of dual taxation by the Centre and the states.

The GST revenue has slowly but surely surged. The gains have mainly come from better compliance, facilitated by: (a) input credit availment linked to uploading of supply invoices; (b) introduction of e-invoice for those with an annual turnover of more than Rs 20 lakh; and (c) filing of e-way bills by transporters for consignment worth more than Rs 50,000. The latest revenue numbers show that the GST collections as a proportion of gross domestic product (GDP) rose from 5.8 per cent in 2020-21 to 6.4 per cent in 2021-22 — this despite a three-percentage point decline in the incidence of duty, according to the Reserve Bank of India, which would translate into a 1 per cent drop in GST collection as a proportion of GDP, according to a recent article by Arvind Subramanian and Josh Felman. This would imply that the GST-GSDP ratio, in 2021-22 would actually be 7.4 per cent if the revenue neutral pre-GST rate of 14.8 per cent had been maintained.

The next surge in revenue will, however, have to come from an increase in the incidence of duty from the current level of 11.8  per cent to the pre-GST level of 14.8 per cent as recommended by the Fifteenth Finance Commission in its recent report. It is, therefore, in this background that the recommendations of the Bommai committee set up by the GST Council acquire importance. The challenge is to carry out the rate rationalisation exercise in such a manner as to minimise the inflationary pressure by perhaps bringing down the standard rate to 16 per cent and compensating for this drop in average incidence by phasing out exemptions, raising the merit rate of 5 per cent, merging the 12 per cent rate with the standard rate and tweaking the peak rate. The buoyant GST revenues going forward can help the economy reach the medium-term goal of a tax-to-GDP ratio of 20 per cent, which has eluded us for long. This will give the government the fiscal firepower to spend heavily on education and health, which in turn can jack up the total factor productivity to sustain a 7 per cent GDP growth in the remaining years of this decade.

While the revenue dimension of the GST reform is important, one must realise that the GST is more than just a tax reform. It has unleashed triggers in the economy that have not been appreciated because of inadequate analysis of its economic impact. An important constraint has been the sharing of the GSTN data with economists and important think tanks. The government must place the huge database generated by GSTN in the public domain. There has been some discussion that such a data portal is planned in the NITI Aayog from which data can flow to the private users. A number of questions need investigation by crunching this data, which will enrich and illuminate public policy debates. An illustrative list of such issues is given below:

(a) Have the GST reforms widened the internal market as visualised by abolishing internal barriers to movement of goods like the Octroi and the entry tax? In this case, can we use the IGST, or integrated goods and services tax, collections net of IGST on imports to study this?

(b) Have service tax companies benefited from the unlocking of embedded taxes in capital goods whose credit was unavailable to them pre-GST? Can we use GST turnover data provided by service companies in the income tax return and compare it with pre-GST situation to show that these companies may have shown a more accurate picture of their turnover to avail themselves of the tax credit?

(c) Has the GST reform ensured greater fiscal equity?  Have the poorer consumption states of UP and Bihar gained more revenue as a proportion of their state GSDP compared to the pre-GST situation?

(d) How has the composition of goods carried by transporters in inter-state trade changed as a result of the reduction in trip time? Are more perishable goods carried now compared to pre-GST times?

(e) How much has the cash-Cenvat ratio changed in the GST collections from the earlier 20:80 ratio — is this due to better compliance?

(f) Have purchases of goods and services by larger companies from smaller ones changed compared to pre-GST times?

These are some of the interesting questions that await a detailed study and may help to bring out the larger economic impact of the GST, which is now still looked at through the narrow prism of revenues. Going forward, we also need to look at inclusion of items in the GST from a larger macro perspective. For example, inclusion of land and real estate in the GST may have to be looked at from the perspective of factor market reform, for the GST revenue gains may not be significant as the output revenue would be offset by the input tax credit on cement and steel. Any incremental revenue is more likely to come from the direct tax side. Similarly, the inclusion of electricity can have a significant impact on energy reforms. It could lead to greater transparency in the study of subsidies enjoyed by each of the routes to produce electricity — coal, gas and renewables. This could also have a climate policy dimension, although the state revenues may take a hit.

In conclusion, to paraphrase Neville Cardus’s great line made in a cricketing context is perhaps relevant here — “Who knows GST who only GST knows”.

The writer is a retired member, Central Board of Indirect Taxes & Customs. The views expressed are personal