BL Explainer - Five years on, has GST delivered?

When was GST launched? What was its objective?

Though the Indian Goods and Services Tax came into force on July 1, 2017, it was in the works for at least 12 years before that. The Kelkar Task Force on FRBM was the first to recommend a comprehensive tax on all goods and services, replacing Central level VAT and State level VATs in 2005. It is a landmark reform that sought to remove a complex system of indirect taxes with ‘one nation, one tax’ for every product or service. In the earlier indirect tax regime, the Centre could tax goods up to the production or manufacturing stage, while States collected taxes on the sale or distribution of goods. The right to tax services was vested with the Centre alone. Under the GST, both the Centre and the States can tax the entire supply chain in both goods as well as services – right from production to distribution.

The system was supposed to be simpler for consumers as well as suppliers, with most goods falling within the tax slabs of 0, 5, 12, 18 and 28 per cent. With all the returns and invoices uploaded on a centralised system, tax evasion was expected to reduce. Some of the in-built features of the GST such as input tax credit and reverse charge mechanism were expected to result in companies shifting from unorganised to the organised sector, thus resulting in higher tax collections and formalisation of the economy.

In the last five years, has it achieved that objective?

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There are still many niggling issues, but the objective of achieving a unified indirect tax system has largely been achieved. Implementing a unified tax system for a country as large and as densely populated as India was a mammoth task. The on-boarding of taxpayers from the old tax regime to GST was done very efficiently. As on April 30, 2022, there were 1.36 crore tax payers registered on the GSTN, of which 1.17 crore are normal taxpayers and 16 lakh are composition taxpayers (paying taxes at a lower rate).

The taxpayer base has expanded after GST implementation, with many companies asking their suppliers to register themselves to receive input tax credit seamlessly. Tax collections were impaired by the economic slowdown in FY20 and the pandemic, but it has improved since then to achieve record growth of over 27 per cent in FY22. Digitisation of the entire system has made it easier to spot and check tax evasion.

Then, why are some states unhappy with the way GST is administered? Will it come in the way of further GST reform?

GST is a destination-based tax wherein tax is collected by the State where the goods and services are sold, rather than the State where the producer is based. Some States which produce minerals, goods or agri commodities which are shipped to other States have lost a part of their revenue due to this transition.

The GST compensation cess, which guaranteed 14 per cent growth in GST revenue over the base year of 2015-16, for the first 5 years, was to help States tide over the transition period. But the pandemic and the recession in FY20 has impacted State finances, making many States ask for extension of compensation payment beyond the June 30, 2022 deadline. These developments have created some friction, but GST embodies the spirit of cooperative federalism, and the manner in which it has functioned over the last five years shows that there will not be too much trouble in finding solutions to future problems too.

What needs to be done to make GST more effective?

The requirement for filing e-invoices and the implementation of e-way bills has fortified the self-policing mechanism in the GST system. It now needs to move towards its original design, wherein the return and invoices of the suppliers and purchaser are matched and the final tax payment is automatically computed by the system after accounting for the input tax credit. That will help check tax evasion and also expand the tax payer base further.

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