Explained: Why India Needs The GST

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The Goods and Services Tax (GST) – the biggest tax reform attempted by India – is now just a step away from its realisation. The Congress party, which has stalled the reform for long, has finally agreed to a debate on the bill in Rajya Sabha. Today, Finance Minister Arun Jaitley and Parliamentary Affairs Minister Ananth Kumar are expected to meet again with the Congress leadership. The Congress expected to agree to the BJP’s idea of putting a cap in the statute instead of the Constitution bill – a major contentious issue between the two sides.

If the bill passes the Rajya Sabha test, it will be a historic moment.

But why is GST important? What can be said about its design? How does it compare with similar tax reform in other countries?

Arvind Subramanian, Chief Economic Adviser to the Government of India and Hasmukh Adhia, Revenue Secretary answer these questions in a piece they jointly penned for today’s edition of The Hindu.

They write that the country will benefit immensely in three ways from the GST:

First, the GST will greatly increase the revenues available at the states’ and centre’s disposal by expanding the tax base. More importantly, the resources of the poorer states (or consumer states) like, Uttar Pradesh, Bihar and Madhya Pradesh will increase substantially.

Second, the GST will facilitate ‘Make in India’ by converting the geographical landscape of the country into a single market. Despite being one country, India is a union of 30 or more markets. Too many taxes in the current system like the Central Sales Tax (CST) on inter-state sales of goods; numerous intra-state taxes; and the extensive nature of countervailing duty exemptions, favour imports over domestic production.

GST would get rid of the CST and subsume most of the other taxes. And since, it will also be applicable on imports, the major tax factor working against ‘making in India’ will disappear, greatly boosting the production and in turn exports. This will ultimately help bridge the current account deficit.

Third, the GST would improve tax governance in two ways.

One, like the value added tax (VAT), it is a self-collecting and self-enforcing tax. What it essentially means it that the companies buying supplies from outside parties will insist on tax payment on goods supplied as without this they can’t get setoffs on their own final product sales.

Two, due to the dual monitoring structure of the GST – one by the states and another by the Centre – it is difficult to evade tax. Even if one set of tax authorities overlooks or fails to detect evasion, there is the possibility that the other overseeing authority may not.

To reap these benefits, the Arvind-Adhia duo notes, it is important that the GST is well-designed and the revenue-neutral rate is such that protects revenue, simplifies administration, encourages compliance, avoids adding to inflationary pressures, and keeps India in the range of countries with reasonable levels of indirect taxes.

Various critics argue the feasibility of implementing a moth-eaten GST. But glass half full is much better than an empty glass. No reform is perfect and there is no point in waiting for a perfect bill as it may never come. It is important that we start with the current bill and learn from its flaws and improvise as we go along.

The CEA and the Revenue Secretary note in their piece that GST-type taxes in large federal systems are either overly centralised, depriving the sub-federal levels of fiscal autonomy (Australia, Germany and Austria); or where there is a dual structure, they are administered independently – creating too many differences in tax bases and rates that weaken compliance and make inter-state transactions difficult to tax (Brazil, Russia and Argentina). On the other hand, India has been able to minimise these disadvantages and come up with a bill with very few compromises.

Achieving this feat in a noisy multiparty democracy like India and convincing more than 30 administrations across the country to give up their autonomy to a large extent on taxation is truly remarkable.

However, the duo warns us about not jumping the gun in judging the GST tax regime too soon. It should be done over a longer period of say one or two years as it is bound to face some hiccups in the beginning due to its complex nature. Since, both states and centre will have dual control, this may create a lot of tension in the early phases of implementation. The IT infrastructure may also throw up some glitches.

However, that shouldn’t hold us back from recognising the progress made on the GST, a reform started by Atal Bihari Vajpayee, pursued by Manmohan Singh, and now brought to near fruition by Narendra Modi. If it gets passed in the upcoming days, it will be one of the biggest achievements of this government.