GST: More than three years on, several problems remain

Billed as a ‘transformative’ reform, the Goods and Services Tax (GST) is now more than three years old. It is time to take stock. GST is a single nationwide tax that subsumes within it more than a dozen taxes of the pre-GST era, namely central excise duty (CED), service tax, sales tax/value added tax (VAT) besides a host of local taxes such as octroi, purchase tax, turnover tax, etc. The old regime was afflicted with several anomalies.

First, each state was free to impose as many taxes and fix the rate for each item as it wished. This not only resulted in multiplicity of taxes but also vast variation in the rate across states. For instance, on natural gas, VAT varies from 5% in Rajasthan to 14.5% in Andhra Pradesh and Karnataka to 21% in Uttar Pradesh.

Second, it suffered from the so-called ‘cascading’ effect or ‘tax-on-tax’. For instance, the retail price of petrol in Delhi is Rs 80 per litre, of that the tax component is Rs 53 per litre -- CED Rs 33/litre; VAT Rs 20/litre. The latter includes Rs 9/litre toward VAT on CED, or the cascading effect.

Third, millions of transactions were happening without invoicing, thereby escaping the tax net. Further, the manner of crafting taxes made the system susceptible to manipulation. For instance, Gujarat imposed ‘purchase tax’ on that portion of inputs used for making urea that is sold outside the state.

Fourth, due to several taxes and multiple authorities involved in their administration, businesses incurred high transaction costs (or, shall we say, ‘miscellaneous expenses’).

GST being a ‘single tax’ applied all over India, provision of set-off for tax paid on inputs and in-built disincentive for an entity not keen on reporting its purchases/sales (or else, it won’t get input tax credit), the new regime has paved the way for freeing the system from the above anomalies. But several problems remain.

First, we are still far from the simple tax regime that GST was intended to be. There are five tax slabs, namely 0%, 5%, 12%, 18% and 28%. Accounting for cesses on items in the 28% slab, the number would be even higher. This is despite a single GST @12% recommended by the Dr Kelkar committee or even the three rates regimes -- 12%, 17-18% and 40% -- recommended by then chief economic adviser (CEA) Arvind Subramanian.

Second, major items such as crude oil, natural gas, petrol, diesel, aviation turbine fuel (ATF), electricity, alcohol, etc., continue to be excluded. These products continue to be governed by the pre-GST regime. As a result, while on the one hand, oil and gas companies don’t get credit for the taxes paid on their purchase of inputs, consumables and equipment, on the other hand, their output faces multiple levies and their cascading effect.

In electricity, too, power companies don’t get any credit for taxes paid on inputs – equipment, stores, etc -- used in its generation and distribution, resulting in higher cost. Furthermore, Entry 53 in the State List of the Seventh Schedule of the Constitution empowers the states to collect duty on sale of electricity (except when it is consumed by the Union government or Railways). Since, no offset is available for the duty, this exacerbates the cost.

Oil and gas products and electricity are used in almost every sector of the economy. As long as these are kept out, our industries will continue to be hamstrung by high cost. For a number of other items such as cement, scooter, etc., the potential gain from including them under GST is nullified by taxing them at a high 28%.

Third, several sectors face an ‘inverted duty’ structure – that is, the tax on finished product is lower than that on raw materials and intermediates used in its production. For instance, GST on complex fertilisers is 5%, against 18% on ammonia and 12% on phosphoric acid. This leads to output tax liability not being adequate to offset input tax credit (ITC) resulting in ‘unabsorbed’ tax credit. The situation is exacerbated by control on fertiliser selling price at low level.

The telecom sector also faces a similar problem. Service providers have made heavy investments in augmenting the infrastructure even as there has been a steep drop in their revenue, resulting in mismatch between input and output tax. They are unable to claim refund of the taxes paid on inputs as the GST law mandates corresponding output tax liability which is insufficient.

Fourth, the decision of the GST Council to exempt businesses with annual turnover less than Rs 40 lakh from payment of tax, allowing trader/manufacturer with turnover of less than Rs 1.5 crore to opt for ‘composition scheme’ (CS) and pay tax at 1% and service providers with turnover less than Rs 50 lakh pay tax at 6% under CS is flawed. This is anathema to the very concept of indirect taxation which requires that whatever tax amount is collected from the consumer is deposited with the government. No wonder this has seriously compromised revenue. This has led to a bizarre scenario whereby nearly 75% of registered entities having turnover of less than Rs 1 crore contribute a miniscule 6.5% of the total tax revenue.

The GST Council has done little to address these problems. Of the five petroleum products, while inclusion of gas and ATF in GST was taken up for consideration in the previous two years only to be deferred, there is not even a whisper about the other three. On correcting the inverted duty structure, the FM often promises to do it but it is never done. As for making the tax simple, moving to even a three-slab regime is a distant possibility, let alone a single rate GST. In all three areas, the required action should be fast-tracked.

Further, the government should withdraw exemption/concessional rate for small businesses though it can continue to encourage them by ensuring hassle-free filing of returns, minimal documentation and ease of doing business.

(The writer is a New Delhi-based policy analyst)