Thursday, 10 February 2022 | Krishan Kalra
One of the announcements, by the Finance Minister (FM), during her Budget 2022 speech, that brought cheer all around, was about the Goods and Services Tax (GST) collections during January ’22 setting a new record of over Rs 1.4 lakh crore. Bringing in GST from 2017 is arguably, the best reform introduced by the Modi government. Not only has it replaced a plethora of indirect taxes but has also relieved everyone from the harassment of Central Sales Tax, inter-state sales tax, different sales tax on the same product in different states, multi-point sales tax, entry tax, Octroi duty and other such legacies of the colonial times. Perhaps the biggest benefit to the exchequer is the unravelling of revenue leakages at many levels – trucks full of goods leaving factories without paying excise duty and even crossing state borders with a little bit of cash changing hands at each point was a common practice in the pre GST era. GST is opening up hitherto unknown audit trails. Continuous rise in collections is a proof of gains already garnered by the Central and State governments. GST is still a ‘work in progress’ and one can’t even fathom the potential of this instrument and the enormous changes it can bring in to the government’s coffers; how it can empower the government to provide a decent social security umbrella for the people as also spend more on the much needed infrastructure across the country and trigger huge investments by the private sector. GST alone has the potential to put us on the quick growth path by plugging leakages and reducing tax evasion. Everyone knows that the size of informal economy in our country is probably bigger than – or at least equal to – that of the formal one. GST can help the country bring out such ‘below the tax radar’ businesses and monetise them.
The monumental reform was not easy to introduce. It had been on the anvil for a long time before even the council – with the union FM as chairperson and State FMs as members – was set up. It was in 2000 that the idea of adopting GST was first suggested by the Atal Bihari Vajpayee government. FMs of the states formed an empowered committee (EC) to create a structure for GST based on their experience in designing State VAT. West Bengal FM Asim Dasgupta, chairman of the EC, worked on this for many years; he was succeeded by Sushil Modi of Bihar, then Abdul Rahim Rather of J&K followed by KM Mani of Kerala and finally Amit Mitra from West Bengal. A great tradition to note here is that all chairmen of EC have come from opposition ruled states, which makes the EC a truly democratic body even though the council is chaired by the union FM. It was only in September 2016 that the constitutional amendment bill for bringing in GST was approved and finally the system was introduced from July 2017. It may be pertinent to mention here that the first country in the world to introduce GST was France that did so in 1954. Now, of course, many countries – including UK, Canada, Australia, Spain, Italy, South Korea and Singapore -have adopted the system. Meetings of the GST council are held regularly to review the rules and rates – as many as 46 meetings have been held in the four and half years – and the decision making process is quite complex because states with different ideologies, many diametrically opposite that of the center, passionately discuss the issues and the union FM is often not able to bring about a consensus and push changes – a good thing to maintain the democratic nature of the reforms process. Every one is aware that our GST rates are perhaps the highest in the world and also several crucial items are still outside it’s ambit but, as I said earlier, it is still “a work in progress” and we need few more years before it matures; and in the process bring in increasing gains for all governments.
According to various studies, we have enough headroom to increase our tax collections under GST. Average total tax collections in OECD countries is a whopping 34% of their GDP. In our case we should see a ratio of about 12% for FY 21-22. Whereas we may never reach the dizzying heights of OECD, there’s enough room to move up – perhaps inch up to 20% in a few years. Our GST rates will have to go down gradually, also everything has to come under GST and yet the collections will almost certainly keep increasing because more and more manufacturers and traders will go ‘straight’ and comply. There are two issues at the core of this exercise. First – making our audit trails more precise and sophisticated. The modalities of GST – if followed strictly – leave very little room for evasion and even avoidance of tax. Since GST is being collected mostly at the point of final saleevery link in the value chain is open to scrutiny; everyone is keen to ensure their input credits for what they have paid for their purchases of raw materials, parts, packing material, services et al. If the audit trails are scrutinised meticulously and the big data thus mined is systematically analyzed by our savvy techies, there’s literally no scope for manipulation by the traders and small manufacturers- usually the more vulnerable points in the process. Data mining and analytics has to be developed into a sharp science by roping in experts from the industry. Secondly, at some stage, government has to bite the bullet, shun political patronage and bring agriculture into the tax net. If the handsome increase in tax collections has happened despite the dreaded Covid19 – which already has and continues to inflict tragic loss of lives and livelihoods – one can hope for better things in future. I feel that the robust acceptability of GST, as well as other steps for improving ‘ease of doing business’ has also had a salutary effect on the FDI inflows. Recent announcement of the mega 24MTPA steel plant in Odisha under a JV between Arcellor Mittal and Nippon Steel – world’s largest and second largest steel producers – heathy global interest in our semiconductor plans, rapid funding of our startups and funding of other projects definitely have a connection with the onset of ‘GST era’ and acceleration in collections. Everyone appreciates system improvements in the country where they are contemplating investments.
Hopefully increasing coverage of vaccinations will ensure that we can go back to a new normal working of industry and commerce. After all, scientific advice continues to remind us that ‘way to arrest the frightening march of the pandemic is through vaccination and Covid appropriate protocols like proper masking, social distancing and personal hygiene’ and not lockdowns and shutting down factories.
(A veteran of the corporate world, the author now does only voluntary work in various spheres. Views expressed are personal)
