The GST Council should stop tinkering, focus on simplifying rate slabs

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The upcoming GST Council meeting is perhaps the most eagerly awaited one, as numerous industries, including automakers, have petitioned for lowering GST rates on their products to help them fight the slowdown. A more exigent issue before the Council is the declining GST collections and the consequent fiscal problems. With total collection this year lower than the budgeted amount, the shortfall is a cause for worry. Of greater concern is the lower compensation cess being collected this fiscal year; only half the required monthly amount has been collected so far. Since this money is used to compensate States, if the growth in GST revenue is under 14 percent, the Centre could have a problem meeting the payouts to the States this fiscal year. With growth in corporate and income tax collections also in lower single digits so far this fiscal, there is little room for the GST Council to move rates lower across the board. Moreover, it is not clear whether a rate cut would be enough to spur demand. In the auto sector, for instance, total indirect tax incidence on automobiles was, in fact, higher in the pre-GST regime. While a rate cut, which will help reduce prices for the end buyer, may be tempting, it cannot be seen as a panacea for any sector facing a slowdown. In many sectors, the demand slowdown has already led to sharp discounts and price corrections, but that has not resulted in a significant delta in sales. That said, there is a need for rationalisation and simplification of GST rate slabs.

India should move towards one rate between 12 and 18 percent at which most goods and services can be taxed, with a lower rate for essential goods and a higher one for luxury products. A simplified rate regime can also aid in improving compliance. The annual growth rate in GST revenue promised to States of 14 percent also needs to be renegotiated. It is obvious that the growth in tax base and the higher collections, originally envisaged, are not achievable immediately; as seen in the large shortfall in FY19. Also, with nominal GDP growth between 8 and 9 percent, GST revenue projections need to be recalibrated. The GST Council also needs to pay serious attention to the problems in the GSTN, the IT backbone of the GST system. With invoice matching still not enforced, bogus claims of input tax credit are leading to revenue leakage. The fact that most taxpayers are still struggling to file the annual GST returns for FY18 shows that the GSTN is still far from being user-friendly and needs a thorough overhaul. Rolling back anti-tax evasion levers such as reverse charge mechanism in the GST system has also hurt tax collections. Unless this is brought back, the GST’s core objectives of expansion of the tax base or formalisation of the unorganised sector cannot be fully realised.

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