Time to rationalise

GST structure needs improvement

It has been reported that the Goods and Services Tax (GST) Council will discuss in its next meeting a possible mechanism for dispute redress that is being developed by the Union Ministry of Finance. So far, the GST Council has usually run on consensus, although it has been structured so that voting is permissible and possible. Obtaining a consensus on every decision may not be possible and there could be disputes between the Centre and the states, or among the states themselves. Thus, having a dispute resolution mechanism as envisaged in the law would help. GST is still a work in progress; institutionally, it is the first new federal mechanism that has been constructed in decades, and will require tweaking to ensure that neither side has an upper hand and that disputes are resolved both equitably and efficiently.

The era of consensus in the GST Council may also be coming to an end soon. This is because the initial five-year period of the GST regime is due to cease. This period was set aside for the states to receive “compensation” in return for their willingness to transition to the GST system. Built into the compensation was a revenue growth assumption of 14 per cent for every year. This was not borne out in collections. The Union government has thus complained that it has to guarantee GST transfers to the states even in bad times like the pandemic year of 2020-21; the states in turn can justifiably point to delays in these disbursements. State governments’ desire to continue the compensation, funded through a “compensation cess”, runs up against the pandemic-era bargain in which the Union borrowed money against future cess revenues in order to continue making payments to states. Thus, if guaranteed revenue growth is to continue, the compensation cess itself will have to be raised further, which is not a good idea since it will add to the complexities in the tax.

Whatever the understandable concerns on both sides, the fact is that guaranteed increases for state governments cannot continue forever. The question for state governments is the following: Now that the general underperformance of GST in terms of revenue collection is going to hit them, should rationalising GST slabs not be a priority? So far states have had every incentive to collaborate in populist suggestions that rates be lowered. But now questions of GST performance as a tax must be taken up by the state governments because it directly impacts their own revenue.

The time has come to remove items from the GST exemption list and reduce the number of slabs. The rate should also be set at the revenue-neutral level. The fact is that GST was a messy compromise, and looked very little like the tax that was first proposed. Multiple slabs were put into place, adding to the complexity, and no attempt was made to properly calibrate a revenue-neutral rate. It has always been the contention of GST supporters, including this newspaper, that these problems will be addressed over time. The ending of the compensation period is a good time to begin that work.