The Goods and Services Tax (GST) stands as a landmark reform in India’s indirect tax framework, drawing from the global experience of over 160 countries that implemented similar taxes. Designed as a destination-based consumption tax, GST consolidated numerous central and state taxes with goals to improve tax efficiency, reduce price inflation, and stimulate GDP growth. However, despite these intentions, the states relinquished substantial taxing authority, raising concerns over fiscal autonomy. To mitigate this, a compensation mechanism guaranteed a 14% growth in GST revenue for the initial five years. As GST nears its seven-year mark, it is critical to assess its performance against its initial promises and chart the course for future reforms.
The early years of GST saw concerns over revenue performance, but recent figures post-Covid-19 recovery tell a different story. In FY24, monthly GST collections averaged ₹1.68 lakh crore with an 11.6% growth rate, peaking at ₹2.1 lakh crore in April 2024. However, when comparing pre-GST and post-GST periods, the increase in the tax base remains elusive. From 2012-2017, the taxes subsumed under GST averaged 6.13% of GDP, which declined to 5.65% during 2017-2023, excluding GST compensation cess.
State performance under GST has been uneven. In 16 of the 17 major states, GST’s share in Gross State Domestic Product (GSDP) decreased post-GST, with Jharkhand as the exception. Furthermore, 15 states saw a decline in GST’s contribution to their Own Tax Revenue (OTR), with Maharashtra and Tamil Nadu bucking this trend. These discrepancies necessitate a closer examination of the factors at play and highlight the need for targeted reforms.
One key issue is the complexity of the GST rate structure, which has hindered compliance and facilitated fraudulent claims for input tax credit. The equal division of total tax revenue between the Union and the states also needs re-evaluation, particularly concerning the operation of Integrated GST (IGST). Consumption-based states like Kerala have reported lower-than-expected revenue, with the IGST-SGST ratio remaining low at 1.2.
Reforming GST involves simplifying the rate structure. Former chief economic advisor Arvind Subramanian advocated for a three-rate system—18% standard, 10% lower, and 40% demerit rates. Post-compensation, integrating cesses into the normal rate structure is crucial to avoid revenue distortions. Vijay Kelkar, a principal architect of GST in India, suggested a single rate, noting that 80% of GST-implementing countries, including Singapore and Japan, use this approach to enhance compliance and reduce disputes.
While rate reform is essential, it must not compromise the country’s already low tax effort. Reforms should not exacerbate consumption inequality or fuel inflation, as these disproportionately affect the poor. Adopting reforms from countries with higher tax efforts and more homogeneous socio-economic structures requires careful consideration. Effective reforms need robust research, yet the availability of relevant data remains limited. Addressing these issues with comprehensive, data-driven strategies is vital for the continued evolution and success of GST in India.
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