GST - Act of God?
Akash Bagrecha
Co-Founder at Jordensky | Simplifying Accounting, Taxes, E-Commerce, and Company Setups in India
Today’s Brew
The switch to the Goods and Services Tax (GST) in July 2017 was a historic moment in India’s fiscal trajectory. It scrapped a plethora of central and state taxes and paved the way for a uniform tax regime and a common market across the country. Ideally, there should have been fewer GST slabs, but the idea was always to move to this once the regime stabilized.
Like all big-ticket reforms, GST had to wait for a long time to see the light of day. Reforms such as GST are difficult to implement not because they do not have enough traction as ideas, but because the transition from the status quo to a new framework is challenging
The biggest question which needed to be addressed before shifting to GST was what if revenue collections fell short of expectations?
Let’s take a step back and understand the rationale for GST
With GST implementation in 2017, the principle of indirect taxation for many goods and services changed from origin-based to destination-based. This means that the ability to tax goods and services and raise revenue shifted from origin states (where the good or service is produced) to destination states (where it is consumed). This change posed a risk of revenue uncertainty for some states. Agree?
Well, that’s where the Centre comes in the play and this concern of states was addressed through constitutional amendments to provide for compensation to states for five years to avoid any revenue loss due to GST.
The Act guarantees all states an annual growth rate of 14 percent in their GST revenue during the period July 2017-June 2022. If a state’s GST revenue grows slower than 14 percent, such ‘loss of revenue’ will be taken care of by the Centre by providing GST compensation grants to the state. To provide these grants, the Centre levies a GST compensation cess on certain luxury and sin goods such as cigarettes and tobacco products, pan masala, caffeinated beverages, coal, and certain passenger vehicles.
Clearly 14% was major issues for the Centre where Economy was growing
To be sure, the current economic situation, which caused this crisis, is indeed extraordinary. The Indian economy will witness a contraction, of at least 5% this year. Revenue collections will miss projections made in February, before the pandemic spread. However, GST’s problems go back to the pre-COVID-19 period.
While most people agree that a unified tax was desirable (this continues to be the case), its revenue-generating abilities were grossly overestimated initially, especially because slabs have gone through constant revision.
Just one example should make this clear. The budget estimate for the Centre’s GST collections was ?7.43 lakh crore in 2018-19, the first full budget after GST’s implementation. This number is just ?6.9 lakh crore in 2020-21 — so, a tax head is expected to shrink even when GDP has grown. Even the reduced targets have not been realized. The Centre’s GST collections in 2018-19 and 2019-20 were only 78% and 90% of budgeted targets.
So what are the options available to States?
Option 1: “Borrow 97,000 crores (shortfall that isn’t attributable to COVID) using a special window in consultation with the RBI. We will make sure you can borrow at very low rates and pay interest and Principle using GST compensation cess
Option 2: “Borrow 2.35 lakh crore (the entire shortfall amount) from the market. Listen, when you are borrowing from the market, you have to pay market-determined rates. It will be higher. And you’ll also have to pay the interest yourself. However, you can pay the principal using compensation cess and we will extend the program beyond 2022 until you can pay your dues in full. So yeah, you decide.”
Well States, decide what you want to do and stop Bothering us going forward for GST. Its ACT of GOD we cannot do anything
India’s GST experience raises a bigger point, and perhaps highlights a future lesson, about policy reforms. All reforms, no matter how desirable they are in principle, need to be thought through carefully before being rolled out. It is always tempting for regimes to fast track them, without weighing all pros and cons.
We tried to cover everything but if you think we have missed any important point then let us know.
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