This day last year, former Finance Minister Arun Jaitley, who heralded the Goods and Services Tax, passed away. The introduction of GST is a major reform that the Indian economy had waited for over a decade. From midnight, July 1, 2017, the unimaginable happened — all of India became one market, interstate barriers disappeared, multiple taxes were subsumed to become one, double taxation was eliminated, the cascading effect of taxes got mitigated. Recounting the benefits that this single tax has given us is the best tribute we can pay Jaitley today.
Prior to this date, when the GST was being evolved, the contributions made by the Empowered Committee of State Finance Ministers and its chairmen — Asim Dasgupta, Sushil Modi, Abdul Rahim Rather, K M Mani and Amit Mitra — are well recognised. With his affable nature, Jaitley built on the mutual trust, so required in the critical years, when the decades-long efforts were reaching a crescendo.
GST subsumed 17 different taxes and 13 cesses. It ensured that there were no more queues of trucks and no more state barriers.
In the pre-GST era, the total of VAT, excise, CST and their cascading effect led to 31 per cent as tax payable, on an average, for a consumer. An example is of the entertainment tax — it was being levied at 35 per cent in some states while it was 110 per cent in others. High tax rates were the norm and placed a heavy burden on the consumer. In its first two years, as the collections improved, the GST Council, in each of its meetings, kept reducing the tax burden on consumers.
Even at introduction, items which were in the 31 per cent or more tax slab in the pre-GST era were brought down to the 28 per cent tax rate. This rate slab has been further pruned drastically. Most items have been brought in the 18 per cent, 12 per cent or even 5 per cent category. Cinema tickets, shown earlier as an example of high tax ranging from 35 per cent-110 per cent, are now at 12 per cent or 18 per cent only. Most items of daily common use are in the zero to 5 per cent slab. Restaurants and construction services are at the 5 per cent slab now. Construction of residential complexes is at 5 per cent and affordable housing is at 1 per cent. In short, today, we have 480 items in the nil or 5 per cent tax rate, 221 items are at 12 per cent and 607 items in the 18 per cent rate. Only 29 items are in the 28 per cent tax rate. The loss of revenue, due collectively to the reduction in rates, has been more than Rs one lakh crore annually.
An analysis by the Reserve Bank of India (RBI) observes that since the roll out of GST, the rate changes have brought down the GST incidence from 14 per cent to 11.6 per cent.
Several other concessions were brought in. Taxation threshold for goods was increased to Rs 40 lakh. The composition limit was increased from Rs 75 lakh to Rs 1.5 crore. For manufacturers, composition tax rate was lowered from 2 per cent to 1 per cent. The composition scheme was extended to services as well. Special lower rates without Input Tax Credit (ITC) were prescribed for construction and restaurants. Again, as per an RBI calculation, the weighted GST rate at present is 11.6 per cent. The revenue neutral rate determined at the time of GST introduction by its own committee was 15.3 per cent. This explains the revenue loss stated above. The consumer pays less tax now under the GST.
The tax base has widened in the last three years. Today, there are 1.2 crore GST assessees compared to 65 lakh at the time of introduction of the tax regime. The average revenue collected per month for the nine months (July-March) in 2017-18 was Rs 89,700 crore. In the next year 2018-19, this per month average revenue collection rose by 10 per cent to Rs 97,100 crore. In FY 2019-20, the revenue per month was Rs 1,02,000 crore. This steady increase was despite the various concessions and rate reductions mentioned above.
In some cases, rate reductions have resulted in unintended consequences, such as inversion. Manufactured goods in lower slabs have suffered due to inversion in the duty structure. This has led to a situation where imports are getting incentivised. The competitiveness of domestic industry, particularly MSMEs, is being challenged. Items such as footwear, fabrics, readymade garments, bicycles, ink, pharma, medical equipment and many others suffer because of inversion in rates. “Job works”, as a category which brings in value addition and employs more people, also suffers from the inversion of tax rates. The total estimated refunds due to the inverted duty structure are at around Rs 20,000 crore a year.
Small units are kept out of GST. Businesses up to an annual turnover of Rs 40 lakh are GST exempt. This was at Rs 20 lakh at introduction. Manufacturing units with a turnover up to Rs 1.5 crore can avail of the composition scheme and pay just 1 per cent tax. The earlier limit for manufacturing units was Rs 75 lakh with a 2 per cent tax rate. Service providers can also avail the composition and pay a flat 6 per cent tax.
GST is an IT-enabled platform. Accounting and billing software is provided free to the small taxpayers. Those with nil return to file can do so with an SMS. Since the registration is completely online, the refund process is also fully automated. The Centre is the only refund disbursal authority and no physical interface is required.
Substantial concessions are extended to the agriculture sector under GST. Agricultural inputs such as fertilisers, machinery have seen a considerable reduction in rates. Other inputs such as cattle/poultry/aquatic feeds are kept at the nil rate. Agricultural produce such as vegetables, fruits, flowers and foodgrains are exempt from GST. Dairy products — milk, curd, lassi, buttermilk — are also exempt. Minor forest produce such as lac, shellac and sisal leaves are also exempt. Silk cocoon, raw silk, wool, jute fibre are nil rated. In the pre-GST era, many of these were in the 5 per cent slab.
Service inputs to agriculture are similarly treated. Farm labour, renting and leasing of agricultural machinery, fumigation, pre-conditioning, ripening, waxing, retail packing and labelling are exempt from GST. Storage and warehousing of agricultural produce are also exempt. Before the introduction of GST, many such items were taxed at a standard rate of 15 per cent.
Micro, small and medium enterprises (MSMEs) have consistently received sensitive treatment under the GST regime. More than 35 items, which fell in the 28 per cent slab when the tax regime was rolled out, are now in the18 per cent slab. The slab for seven items has been brought down from 28 per cent to 12 per cent while that of six others has come down to 5 per cent from 28 per cent. Items that have large employment creating activities, rough diamond/precious stone sorting and polishing for example, have seen a GST reduction from 3 per cent to 0.25 per cent. Services rendered by MSMEs have also received such sensitive treatment. Restaurants, amusement parks, catering services, online educational journals and periodicals have seen varying levels of reduction.
Jaitley had described the Council as “the first experiment with the federal institution”. He rightly had felt that “it is a body that has behaved with utmost responsibility.” The Council has had 40 meetings till date and the 41st is slated to be held on August 27. The compensation cess collection was slowing in FY 2019-20 and there were delays in payments to the states. Also, with COVID-19 lockdowns and consequential deferrals in tax payments, compensation payments to the states is a concern that the Council has taken cognisance of. Compensation cess is levied only on luxury or sin goods — tobacco products, coal, aerated water and automobiles.
The 41st meet of the GST Council will have a single agenda — compensation payments to the states. In the Council meeting held on January 3-4, 2017, Jaitley as the chairperson “assured that compensation to states shall be paid for 5 years in full within the stipulated period of 5 years and, in case the amount in the GST Compensation Fund fell short of the compensation payable in any bimonthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year, or subsequent years.”
In the Council’s seventh meeting, held on September 22-23, 2016, responding to the then Finance Minister of Haryana, Chairman Jaitley “…observed that the Council would now decide upon compensation and the States had also been empowered in the Council.”
In our quest to create one market in India, the Centre and the states have collectively pooled their fiscal rights in a healthy federal body — the Council. There are challenges — revenue generation and robust technological support are the two obvious immediate concerns. The coronavirus has not deterred the assessee. The states have shown maturity and understanding. The spirit of collective responsibility and statesman-like thinking have kept mutual trust and confidence high. The much talked about cooperative federalism is actually in action in the GST Council. The late former Finance Minister Arun Jaitley shall always be remembered for his contribution in making India a single market.
The writer is Union Finance Minister