The Government of India introduced Goods and Services Tax in July 2017. Since then the Indian Economy has not recovered. All calculations about increased tax collection due to this path breaking reform failed. Under the previous regime i.e. Value Added Tax (VAT) , the States were getting around 10% annual growth in taxes. The Central Government obtained consent of the States for GST by committing 14% per annum increased transfer for next 5 years. Presumption was that the GST implementation would increase the economic activity and tax collection more than that. It was anticipated that the tax reform alone would add to around 1.5 % growth in GDP. All assumptions about increased GDP growth and tax collection have so far gone wrong. The tax collection increase was under 5% at best of times since implementation of GST. The Covid-19 crisis has brought to front the ongoing mess in Centre State financial relations. The GST collections have almost collapsed. The States are asking the Union Govt. to make good its commitment given at the time of seeking their consent for GST. The Central Govt. has no resources to meet its commitment. The Union Finance Minister Nirmala Sitharaman added fuel to the fire by saying that the Centre would not be able to make good the shortfall, terming the pandemic as an Act of God. Everyone is blaming the GST for the economic downturn in the country. My article is an attempt to put things in the right perspective for the common man.
Why Goods and Services Tax (GST)?
India was under a Value Added Tax regime before GST. The State Governments decided the rate of taxation for all the goods produced and sold in their jurisdiction. The rate of tax was decided and collected at the State level. There were variations in the rate of taxation from State to State for the same goods. The industry had to claim input credit separately from different States under the old regime. In terms of ease of doing business, the State borders were as restrictive as international borders. We could see long lines of transport vehicles carrying goods from State to State, facing so many and different compliances.
The GST is definitely the most significant taxation reform undertaken in India since independence. It provides for one market across the country for all goods and services. It provides a Uniform Tax Rate, One Market and compliance mechanisms across the country. It makes the process of claiming input credits and value addition easy and transparent. GST aims to reduce the cascading impact of taxes on product prices thus benefits the consumers. It promotes uninterrupted and faster transportation of goods across the country, thus reduces wattage of time and corrupt practices. GST improves tax collection efficiency and brings transparency. It reduces political and bureaucratic corruption in the tax administration. It provides checks and balances between Centre and State taxation arbitrariness and excesses.
What has gone wrong with the Good and Service Tax (GST) reform in India?
The political executive in the Central Government is obsessed with Head Line Management. Today, the biggest taxation reform since independence is the biggest mess of Centre-States financial relations. The reform is a process, which takes its own time. The successful implementation of such reform requires adequate preparedness. In addition to the Law, it needs rules, forms, computer systems, networking, software applications and integration with the old tax administrations systems. It needs training & education of a large number of accountants, tax administration officials and private tax practitioners. The transition from the old tax regime to the new should not disrupt the business activity. The stabilization of the new tax regime is important before amendments are made. We faulted at all the parameters stated above and then we kept changing the rate of taxation every month, a perfect recipe for confusion and tax evasion.
Government Mismanagement or Act of God?
We have to examine the background in which the GST was implemented. The demonetization was announced in November, 2016, which significantly disrupted the cash circulation in the economy and business activity is a fact. The economic activity had hardly recovered, when in July 2017, the GST was implemented without adequate preparedness. It was assumed as a panacea for all tax evasion and converting the parallel economy to the formal economy. The fact remains that the GDP growth rate of India has seen a continuous decline ever since. The taxation mess and evasion only grew because of poor preparedness and execution of GST.
This is a debatable situation whether Covid-19 crisis is an Act of Gog or not, but this is a fact , when it comes to government policies, they are always taken by this government in a hurry without proper preparedness. GST has made a mess of the Centre-State financial relations. The Central Government can’t leave the States in such a serious humanitarian crisis, without resources. It definitely has more options and resources than the States. The sovereign commitment should be honored without fail. We need the cooperation of States in many other situations, if both start disrespecting their commitments, India as a nation will be in crisis.
It is a failure on the part of the Government to implement such large scale reform in a without proper preparations. It can’t escape from the responsibility under the shield of Covid-19 pandemic.