Simplifying and Rationalising the Goods and Services Tax

Context:

A Committee of Ministers (CoM) appointed by the GST (Goods and Services Tax) Council is presently reassessing the new tax framework, with a primary focus on achieving ‘simplification’ and ‘rationalization’ as core objectives. GST, a unified nationwide tax system, amalgamates more than a dozen taxes from the pre-GST era. Implemented across India, it incorporates a provision for offsetting tax paid on inputs, commonly referred to as input tax credit (ITC).

Relevance:

GS3- Indian Economy

Mains Question:

A Group of Ministers (GoM) set up by the GST (Goods and Services Tax) Council is currently reviewing the GST tax regime with a focus on ‘simplification’ and ‘rationalisation’ as key objectives. In this context, discuss the factors that govern GST collections and the rationale behind the constitution of this GoM. (15 Marks, 250 Words).

More about GST:

• GST aims at eliminating the cascading effect of tax on tax and incentivizes businesses to accurately report all their purchase and sales transactions.
• The Gross GST (GGST) collection comprises various components: Central GST (CGST), imposed by the central government on intrastate transactions within a single state; State GST (SGST), a tax levied by individual state governments on intrastate supplies of goods and services consumed within their respective territories; Integrated GST (IGST) collection, a tax applied to all interstate transactions involving goods and/or services across two or more states/Union Territories (UTs), including collections from the import of goods.
• Additionally, GGST encompasses Compensation Cess (CC), imposed on specific goods and/or services to compensate states for revenue losses incurred due to the GST regime’s implementation. Initially intended for a five-year period until July 1, 2022, it has been extended until March 2026.
• The extension aims to utilize proceeds to repay loans acquired during 2020-21 and 2021-22 to cover shortfalls in cess collections compared to states’ compensation requirements during those years.

Relevant Statistics:

• GGST collections during 2018-19 and 2019-20 typically remained below Rs 100,000 crore per month. Amid the COVID-19 pandemic, collections in the first half of 2020-21 experienced a decline, but rebounded to Rs 100,000 crore during the second half.
• Subsequently, in 2021-22, collections increased, averaging Rs 124,000 crore per month. Further growth was observed in 2022-23, with the monthly average rising to Rs 150,000 crore.
• During the current fiscal year, the monthly average Gross GST (GGST) collections have surged to Rs 166,000 crore between April and November 2023, marking a year-on-year growth of 12 percent. Breaking down the figures, Central GST (CGST) and State GST (SGST) collections have risen by 16.7 percent and 15.4 percent respectively.
• Compensation Cess (CC) collections have also increased by 12.9 percent. However, Integrated GST (IGST) collections have shown a more modest growth of only 8.6 percent.
• This is attributed to a meager growth of 2.6 percent in IGST collections from the import of goods, primarily caused by an 8.7 percent decline in merchandise imports during this period.

Factors Influencing GST Collections:

• Tax collections are primarily influenced by three factors: tax rates, nominal GDP (NGDP), which represents GDP at current prices, and compliance.
• According to a study conducted by the Reserve Bank of India (RBI) in 2022, the weighted average GST rate decreased from 14.4 percent at the time of GST implementation to 11.6 percent in 2019, owing to a series of tax reductions during this period.
• The initial rate of 14.4 percent itself was lower than the revenue neutral rate (RNR) estimated by the Arvind Subramanian Committee, which ranged from 15 to 15.5 percent. RNR is the tax rate intended to generate similar revenue under the new regime as collected from taxes under the previous regime.
• Despite the reduction in GST rates, the increase in GST collections indicates that the other two factors played a significant role. The substantial rise in Nominal Gross Domestic Product (NGDP) by 18.4 percent in 2021-22 and 16.1 percent in 2022-23 contributed to remarkable growth in GGST collections during those periods.
• Although the growth in NGDP slowed to around 9 percent from April to November 2023, the 12 percent increase in GGST collections during this period is attributed to enhanced compliance and evasion prevention efforts.
• Prior to the GST regime, it was feasible to move goods from factories to sales points and sell them to consumers without issuing an invoice, thus avoiding tax payment. This issue was exacerbated by the prevalence of cash transactions, leaving no audit trail.

Initiatives Under GST:

• Under GST, every transaction of a firm is monitored at every stage. Upon the departure of goods from its premises, the firm must generate an electronic invoice (e-invoice), authenticated electronically by the GST Network (GSTN).
• Additionally, the firm is required to produce an electronic Waybill (e-Way bill) through the eWay Bill Portal for any consignment of goods valued above Rs 50,000. This document must be carried by the person responsible for the conveyance transporting the goods.
• The government is also enhancing the GST infrastructure through various measures, including the implementation of AI and ML-based analytics to aid in data evaluation, Aadhaar authentication for registration, and targeted actions against non-filers.
• These initiatives aim to encourage all businesses to participate in the GST network, accurately report all transactions, and prevent fraudulent claims for Input Tax Credit (ITC).
• As a consequence, between April 2018 and April 2023, there was a notable 56 percent increase in the total number of GST return filings, reaching 11.28 million, while the count of active GST taxpayers surged by 33 percent to 13.96 million.
• Regarding evasion detection, apart from approximately Rs 100,000 crore uncovered during 2022-23, the government anticipates detecting evasion amounting to Rs 300,000 crore for the current fiscal year. It aims to recover approximately Rs 50,000 crore within the current year itself.

Way Forward:

• Firstly, the council should contemplate bringing petroleum products under the ambit of GST. Presently, these products are taxed under the pre-GST regime, incurring a considerably higher levy. For example, in Delhi, taxes (comprising central excise duty or CED plus VAT) make up about 80 percent of the ex-refinery price of petrol.
• Shifting to GST taxation would reduce this to 28 percent (even if placed in the highest slab), implying that the Centre and states would still collect over one-third of their current revenue. A robust GST regime should be capable of compensating for this loss.
• Secondly, the council should transition from the current five-tier tax structure (nil, 5 percent, 12 percent, 18 percent, and 28 percent) to a simpler tax framework, as originally envisaged for GST.
• While the Dr. Kelkar committee proposed a single GST rate of 12 percent, Arvind Subramanian recommended a three-rate regime. For the interim, the GST Council may consider adopting Dr. Subramanian’s approach.
• Thirdly, numerous sectors encounter an ‘inverted duty’ structure, wherein the tax on finished products is lower than that on the raw materials (RMs) used in their production. For instance, the GST on complex fertilizers is 5 percent, compared to 18 percent on ammonia and 12 percent on phosphoric acid.
• This leads to an output tax liability insufficient to offset Input Tax Credit (ITC), resulting in ‘unabsorbed’ tax credit. Rectifying this anomaly entails reducing the tax on raw materials to at least the level of tax on finished products.

Conclusion:

The upward trajectory in GST collections since FY 2021-22 instils confidence that the new regime is resilient and sustainable, capable of generating substantial revenue consistently. Leveraging this strength, the GST Council should address the pending issues discussed above.