Seven years of GST: Challenges, achievements, the road ahead

Dipak Kurmi

(The writer can be reached at dipakkurmiglpltd@gmail.com.)

When the Goods and Services Tax (GST) was rolled out seven years ago, on July 1, 2017, there was widespread apprehension about its implementation. Many deemed the decision to proceed with its launch risky, especially coming on the heels of the tumultuous demonetization period just a year earlier. Economists and tax experts made dire predictions, arguing that the country was ill-prepared for such a sweeping tax reform. Nonetheless, then Finance Minister Arun Jaitley made the decisive call to introduce GST without further delay. In hindsight, this decision proved astute, as the economy would have faced prolonged uncertainties had implementation been delayed for broader readiness among stakeholders.

It’s important to note that the idea of a single-point tax had been under discussion for nearly 18 years before its implementation. Originating during the Vajpayee government in 1999, the concept stemmed from recommendations by the Vijay Kelkar task force. This task force advocated for a unified tax structure to replace numerous indirect taxes levied by both the central and state governments. Studies supported this approach, highlighting that countries adopting such systems experienced increased efficiency and economic growth through simplified compliance and enhanced economic integration.

In 2000, an empowered committee of state finance ministers, led by then West Bengal Finance Minister Asim Dasgupta, laid the groundwork for what would evolve into today’s GST Council. This council, representing all states, ensures that revenue matters are jointly deliberated by the Centre and states in a collaborative manner. The committee initially drafted the GST Bill and navigated intricate negotiations to garner state support. Despite achieving broad consensus by 2016, hesitation lingered regarding the launch of GST, culminating in nearly two decades of preparation and deliberation.

One significant challenge arose from the complexity introduced into the initial idea of a single-point tax. This complexity stemmed largely from states’ concerns about potential revenue losses from existing taxes. As a result, the GST system that emerged is multi-layered and operational today. It includes an integrated GST for interstate goods movement, alongside central, state, and union territory GST components. Furthermore, the system incorporates four tax slabs, ranging from five to 28 percent, reflecting varying rates for different goods and services.

In addition to these complexities, states insisted on excluding their biggest revenue sources—petroleum and alcohol—from the GST framework. There was considerable anxiety at the time of its launch about whether states could sustain their finances with the revenue generated from this new indirect tax system. However, these concerns have proven unfounded. In reality, GST revenue collection has far exceeded initial expectations. Recent data indicates that GST collections reached Rs 1.74 lakh crore in June, compared to an average monthly inflow of around Rs 90,000 crore during its first year. Furthermore, a Reserve Bank of India study reveals that states’ own revenue shares have increased over the past two years compared to the pre-GST period.

As states demonstrate increased revenue resilience, there’s potential to reduce reliance on the compensation mechanism originally integrated into the GST framework. Initially slated for five years, its extension to 2026 was necessitated by the COVID-19 impact. Continued robust revenue growth may pave the way to eventually phase out this provision altogether.

Despite numerous implementation challenges, particularly in streamlining bureaucracy and simplifying procedures, the GST Council, comprising representation from all states, convenes regularly to address issues promptly. Initially, a major hurdle involved integrating small and micro businesses into the GST network through computerization, which initially caused significant disruption to the sector. At first, GST was criticised as detrimental to small industries. However, contrary to initial fears, it has successfully onboarded thousands of small enterprises into the digital economy, marking a transformative shift.

There was significant concern that GST would increase the tax burden on the average consumer. However, these fears have been dispelled by recent studies revealing that 60 percent of consumer goods are taxed at the lowest slab of five percent or are exempt. In contrast, only three percent of items face the highest tax rate of 28 percent.

However, it is evident that there is a pressing need to rationalise the GST rate structure. While achieving the original goal of a single-point levy may not be immediately feasible, reducing the number of tax slabs is essential for long-term simplicity. Another crucial reform is to broaden the GST base to include high-value items. This includes petroleum products, with suggestions now extending to electricity and land as well. Initially, products like aviation turbine fuel and natural gas could be incorporated into GST, marking a necessary first step. However, it’s increasingly urgent to also include petrol and diesel in the GST ambit. Alcohol remains a sensitive issue for states due to its significant revenue contribution, yet its eventual integration into GST is inevitable and should be addressed promptly.

During its latest session, the GST Council implemented measures to support micro and small enterprises, including granting amnesty for legacy disputes and increasing the appeal ceiling for disputes. There is also growing recognition of the necessity for a GST appellate tribunal to expedite the resolution of appeals related to disputes.

There is ample room for enhancing GST implementation, which includes streamlining procedures and rationalising tax rates. However, achieving the initial goal of a single-point levy hinges on bringing key sectors such as petroleum into the GST framework. While the Centre must lead this effort, it is equally vital for states to adopt a pragmatic, forward-looking approach. This collective action is essential for GST to effectively catalyse economic growth as intended.