JULY 1, 2017 is indeed a red letter day in Indian history as it was it was on this day that India’s biggest indirect tax reform, a comprehensive dual Goods and Services Tax (GST) was introduced in our country. The authority to levy tax is derived from the Constitution of India, which allocated the power to collect various taxes between the Centre and the states as mentioned in the Union and State list. The Union list included Income Tax, Custom Duty, Excise Duty, Corporation Tax, Estate Duty (property other than agricultural land), taxes on capital value of assets, taxes on capital of companies amongst others, the State list included Stamp Duty, Capitation Tax, Electricity Duty, Estate Duty (Agricultural land), tax on Agricultural Income, Land Revenue, Toll Tax and so on.
When I look back, I am convinced that this distribution of taxes between the Centre and the states was a sound idea as the states could raise resources for the benefit of its people and the deployment of the resources could also be done as per the needs and requirements of the states on a priority basis. However, over the years, experience has shown that this created huge amount of distortions and barriers in trade. The free movements of goods were restricted due to various nakas and chungis (checkpoints) that were established at the state borders, resulting in delays, corruption and harassment.
The concept of GST was first introduced during the government of Prime Minister Atal Bihari Vajpayee in 2000. A committee headed by the then West Bengal Finance Minister, Asim Dasgupta was constituted to design a GST model and bring about a white paper on this concept. Thereafter for 17 years, consensus-building remained a huge challenge and in this context the present government’s ability to get all the states on board in itself was a great feat. The government also managed to get a constitutional amendment (101st Amendment) and made taxation participatory and collaborative for the entire country, thereby bringing about a uniform rate of tax. This has resulted in ease of doing business, creating a favourable business environment and addressing the critical issue of corruption, which has been on a visibledecline.
Needless to say, a reform of this magnitude could not have been done without some teething troubles. The GST council faced the daunting task of ensuring that there is no revenue loss on the implementation of this tax structure and at the same time the incidence of tax continues to be the same, if not lower, for the consumers. The concept of revenue neutrality was by and large maintained but it is impossible to have such precise calculation cutting across various products and items. It is heartening to see that the revenues from GST have crossed the Rs. 1 lakh crore mark three times in the current fiscal. In January 2019, GST collections rose to Rs. 1.02 lakh crore, up 14 per cent from the same month last year when the collection was Rs. 89,825 crore.
What is also laudable is the speed at which the GST council met to resolve the teething troubles to provide relief to the manufacturers, traders and the consumers with the overarching objective of causing minimal pain and seamless transition during the implementation. In all, the GST council has met over 30 times and has consistently worked towards smoothening the tax slabs. The government has been open to ideas and suggestions and has always thought it prudent to take corrective steps if the previous decisions were seen to be disruptive or as creating hurdles.
No doubt, this is just the beginning of the reforms and the real fruits of this will be borne over a period of time by the country. It is expected that the tax base will widen: when GST was implemented 7.2 million of the 8 million indirect tax assesses under the earlier tax system migrated to GST, while 1.3 million new tax payers signed up under the new system. With the passage of time, this number is bound to rise, and bringing more and more people into the regulatory framework.
While collections from GST are still far from optimal levels and they might not be consistent on a monthly basis, but it is a foregone conclusion that they will increase manifold and this collection will provide a huge head room for the government to take up infrastructure development work and social reforms for the benefit of the people in the years to come. One reason why things are taking longer to stabilise is the multiple tax slabs; this, however, was a necessity more than anything else. The GST structure in India has been framed after taking into account the sheer diversity in the number of people and income disparity amongst other factors. Experts have maintained that different items in India have to be categorised differently as there are numerous segments in the country’s diverse society. Therefore, different items used by different segments of the society have to be taxed differently. It is also true, that countries that have adopted a streamlined GST are mostly developed nations, where they do not have a substantial portion of the population below the poverty line. Besides multiple slabs, another challenge for GST implementation has been the impact on small-scale businesses which have had to re-engineer their businesses to adapt to the new tax regime.
As the government proactively engages with the issues and concerns related to GST, India is poised to move towards a two-tier structure. But this would be a reality only once the collections improve and the tax base widens. The Prime Minister has correctly named GST as a Good and Simple Tax and it is indeed the ‘King of Reforms’.