YEAR IN REVIEW: GST. ‘GST should ideally have only two rates’

“The three key objectives of any tax reform are to make it simpler, more efficient and more equitable,” says Satya Poddar, international tax expert, adding that the current Goods and Services Tax regime needs to undergo significant modifications to meet this goal. In an interview to BusinessLine , Poddar also advocates a single rate under the GST, along with a supplementary rate or cess on sin and luxury goods. Excerpts:

How has been the experience with GST so far?

The way GST unfolded was to nobody’s good, and a lot of pain was inflicted on the economy. The three key objectives of any tax reform are: to make it simpler, more efficient and more equitable. This did not happen with GST, and it brought in more complexity in some areas. The whole purpose of GST is to remove the tax on inputs and give full credit and offsets. Exactly the opposite has happened due to factors such as exemption of sectors.

The second flaw is the multiple-rate structure and the HSN (Harmonised Commodity Description and Coding System) codes, which people still have trouble understanding. The three-step return-filing process or three-monthly forms have brought in a lot of complexity. Now, it seems to have been completely abandoned, and without invoice-matching and validation, input tax credit is getting stuck.

Going forward, what can be done to improve GST?

We have to make it efficient, fair and simpler, and out of that will come better compliance. Unless you work on all three aspects at the same time, it will not lead to better compliance. Changes by the GST Council have been temporary adjustments.

But more substantial changes have to be made, including re-designing the whole return-filing process, including sectors such as real estate, petroleum and alcohol, and allowing full input tax credit (ITC) under GST. Also, we have to move away from multiple rates.

What kind of a rate structure would you advise?

GST should ideally have only two rates — 10-12 per cent for all items and then an additional rate or cess. The cess should be for 15-30 items such as automobiles, tobacco, alcohol, petroleum and luxury items and white goods. The items with cess should go through a unique supply chain and not through kirana shops. More than one rate leads to provisions such as the composition scheme, which cannot work under GST, except for very small outfits like dhabas and small retail stores.

How can GST collections be improved?

The system, according to me, is revenue-neutral. A lot of items are outside GST and the tax base is not much wider than the pre-GST regime. The tax rates are also almost at status quo. In the first year, the revenue gap will be bigger due to transitional credit claims of ₹60,000-80,000 crore. I expect the total revenue loss under GST vis-à-vis the old system to be anywhere between 10 per cent and 12 per cent, and most of that will then be due to the Centre.

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