The last five years of the GST journey have been like the samudra manthan that began with the unwanted elements of transition, but slowly yielded the nectar of higher revenues. Many of those who complained about the teething problems of GST perhaps failed to recollect what the indirect tax situation was prior to the implementation of GST: The multiplicity of the Centre and state levies that masked the actual incidence of tax on products, the debilitating effects of the entry tax and the uncertainty of tax rates.
A lot of this improvement can be traced to stricter compliance flowing from three factors. First, denial of input credit to the buyer without the supplier uploading the invoice. Second, the introduction of e-invoicing. And third the introduction of e-waybills for transporters for value exceeding Rs 50,000 per consignment. Another less acknowledged factor is greater coordination between the Central Board of Excise and Customs (CBIC) and Central Board of Direct Taxes (CBDT) in compliance verification. An equally significant achievement is the broad justification of the optimism that GST being the destination-based tax would help in fiscal equity for the augmentation of revenues of the states that consume less.
The micro, small and medium enterprises (MSME) sector has been affected by the GST reforms because the large units have been reluctant to buy from them in the absence of input duty credit. An important measure here would be to amend the law to provide that all units buying from unregistered GST suppliers would have to pay duty on a reverse charge basis. In order to provide greater procedural comfort to the larger units, the provision relating to the issue of e-way bills and other regulatory procedures must be simplified where purchases are from a smaller unit whose turnover is below a threshold. To further incentivise the larger units and encourage them to trade on the TReDS platform, (the institutional mechanism to facilitate the discounting of invoices for MSMEs from corporate buyers through multiple financiers), the Securities and Exchange Board of India (SEBI) can provide higher credit ratings to such units. This will incentivise them to grow.
While the revenue gains have come through better compliance, the next surge in GST revenues will have to come from an increase in the average incidence of GST duties. The recommendation of the committee by the GST council will, therefore, be important. The challenge would be to do it in a manner which is least inflationary. This will require a combination of measures — phasing out of exemptions, raising of the merit rate from the present level of 5 per cent and merging the 12 per cent rate with the standard rate, whether to 16 per cent or 18 per cent. Together with the rate rationalisation exercise, the government will have to look into other GST reforms to trigger economic growth. This will perhaps require including natural gas/ATF under GST in the first round. Further reforms in the factor markets — land, real estate and energy — would require their inclusion in the GST. This is essential because while the economic reforms of the 1990s restructured the product market, the factor market reforms were incomplete.
Finally, GST 2.0 reforms require the creation of federal institutions. We need to create another institution in the form of a GST state secretariat that can bring together senior officers from the Centre and states in an institutional forum registered under the Society Act. This forum could also provide a common point of contact for trade and industry to redress the grievances on non-policy matters. This would demonstrate that despite the recent dissonance, India’s federal institutions are still strong and that the Indian polity is based on cooperative federalism as an innate principle.
The writer is National Leader, Tax and Economic Policy Group, EY India. Views expressed are personal
