Seven Years of GST: Has It Delivered on Its Promise?

For now, we can offer "Two Cheers for GST"—celebrating the successes achieved so far while reserving the third cheer for when the improvements proposed by us have been implemented.

Seven Years of GST

Introduction

The introduction of the Goods and Services Tax (GST) in India on 1st July 2017 was hailed as one of the most significant tax reforms in the country’s history. Intended to unify the complex and fragmented tax structure, the GST aimed to simplify tax administration, enhance compliance, and spur economic growth. After seven years, a comprehensive assessment of the GST’s performance is essential to determine whether it has lived up to its promise. In their detailed paper, Varun Agarwal, Devashish Deshpande, Josh Felman, Theerdha Sara Reji, and Arvind Subramanian evaluate the success and shortcomings of India’s GST regime, providing insights into its impact on revenue, federal relations, and state economies. This article breaks down key findings and critiques of the GST system while offering recommendations for future reforms.

1. Revenue Trends: Slow but Steady Progress

A significant aspect of the GST reform was to boost overall tax revenues by curbing tax evasion and broadening the tax base. However, the paper notes that it took several years for GST collections to recover to pre-GST levels. The sluggish revenue growth in the initial years raised concerns about the effectiveness of the system, with overall collections only recently converging to the levels seen before GST implementation.

The Union Government also made considerable sacrifices, forfeiting up to 1% of GDP in revenues annually during the transition period to smoothen the shift for states. While the initial promise of GST as a revenue-enhancing measure may not have fully materialised in the early years, the recent rise in collections offers hope for a more stable revenue stream in the long run.

2. Fiscal Federalism and State Outcomes

A key feature of the GST was its promise to benefit poorer states through a more equitable distribution of tax revenues. On this front, the paper concludes that the GST has largely delivered on its promise, with the compensation mechanism helping states adjust to the new system. However, one notable suggestion is the potential folding of the compensation cess into the regular rate structure. This could eliminate the need for state revenue guarantees, which were initially provided to support states during the transition period but have now become a contentious issue as the compensation period has ended.

The experience with the revenue guarantee scheme offers crucial lessons for fiscal federalism. Going forward, India may need to reassess how it balances the fiscal needs of states with the broader goal of creating a unified national tax system.

3. The Unaddressed Challenges: Fake Firms and GST Fraud

While the paper provides a robust analysis of GST revenue trends, it omits a critical issue that has plagued the system: fraud. Fake firms and the use of fraudulent GST credits have significantly impacted revenue collection. Despite being an IT-driven system, which should theoretically enhance transparency and compliance, fraudulent claims have undermined the system’s integrity. A deeper exploration into how these practices are affecting the system, along with strategies to address these loopholes, is necessary.

4. Software and Implementation Woes

One of the most persistent challenges since the inception of GST has been technical issues related to the software and filing system. These have been especially problematic for businesses and tax authorities, who face frequent glitches, delayed updates, and complex filing procedures. Despite several revisions and improvements, the technical infrastructure continues to pose difficulties. Addressing these technical bottlenecks is essential for improving compliance and simplifying the tax-paying experience.

5. Dual Jurisdiction: A Burden for Businesses

The dual jurisdiction of GST, wherein both central and state authorities have the power to assess and collect taxes, has introduced complexities for businesses. Compliance has been particularly challenging for entities operating across multiple states, as they must navigate a labyrinth of state-level regulations and requirements. Streamlining this dual authority structure could alleviate compliance burdens, enhance ease of doing business, and foster better cooperation between the central and state governments.

6. Rate Changes and Classification Complexities

Another area that remains underexplored in the paper is the frequency of GST rate changes and the complexity of product and service classifications. Frequent adjustments to tax rates and the convoluted classification system have caused confusion and increased compliance costs for businesses. Furthermore, these issues have eroded the original promise of GST as a “Good and Simple Tax.” Simplifying the rate structure and creating more transparent classification guidelines would enhance the predictability of the tax system and reduce the compliance burden on businesses.

7. Compliance Burden on Small Businesses

Small businesses have arguably borne the brunt of GST’s implementation challenges. The high cost of compliance, frequent filing requirements, and technical glitches have made it difficult for small firms to navigate the GST system. Although the government has introduced measures such as the composition scheme to ease this burden, further simplification is necessary. The paper would have benefitted from a deeper analysis of how GST has affected micro, small, and medium enterprises (MSMEs), along with recommendations for reducing compliance costs.

8. Petroleum Products: The Missing Piece of the GST Puzzle

One ongoing debate in the GST discourse is the exclusion of petroleum products from the tax regime. Given their significant contribution to state revenues, bringing petroleum under the GST umbrella could streamline tax collections, lower fuel prices, and reduce inflationary pressures. However, the political challenges of incorporating petroleum into the GST system have kept it off the table. The authors missed an opportunity to explore the potential revenue and pricing impacts of such a move, which could be a game-changer for the GST regime.

Moving Forward with GST Reforms

While the implementation of the GST has made substantial strides in simplifying India’s tax system and promoting fiscal federalism, several challenges remain unaddressed. The paper by Subramanian et al. offers valuable insights into revenue performance and state outcomes but falls short in examining critical operational and compliance issues that continue to plague the system.

Addressing these challenges is essential to realising the full potential of the GST. From tackling fraud and evasion to streamlining the technical infrastructure and reducing the compliance burden on small businesses, India must take a holistic approach to reforming the GST system. Additionally, serious consideration should be given to the inclusion of petroleum products under GST, which could further stabilise revenue streams and benefit consumers. Only by addressing these outstanding issues can India transform the GST into the truly “Good and Simple Tax” it was intended to be, fostering a more efficient, equitable, and growth-oriented tax environment.

Suggested Reforms:

• Strengthen fraud detection mechanisms.

• Overhaul the GST technical infrastructure for greater stability and user-friendliness.

• Simplify the rate structure and classifications to reduce business complexity.

• Reassess dual jurisdiction to enhance ease of doing business.

• Alleviate compliance burdens on MSMEs through further simplification.

• Explore the inclusion of petroleum products in the GST framework.

Conclusion: The Road Ahead for GST – Two Cheers, For Now

The journey of GST reform in India, from the an_GST of its conception and delivery and the years as a toddler, has been a challenging yet transformative process. While the system has achieved significant milestones in unifying the country’s tax structure and promoting fiscal federalism, there remain critical gaps that need to be addressed. The lessons from the past seven years provide valuable insights into how the GST can evolve into a more robust and efficient tax system. However, issues such as fraud, technical inefficiencies, dual jurisdiction complexities, and the compliance burden on small businesses must be tackled head-on for GST to truly fulfil its potential. Additionally, the inclusion of petroleum products under the GST umbrella remains an important reform waiting to happen.

For now, we can offer "Two Cheers for GST"—celebrating the successes achieved so far while reserving the third cheer for when the proposed improvements have been implemented. Only then can the GST system deliver on its promise of being the "Good and Simple Tax" that drives India’s economic growth in a more equitable and efficient manner.