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Can Budget 2018 Set a Road Map For a Truly 'Good and Simple Tax'? -Rajul Awasthi
-TheWire.in

While the nitty-gritties of GST work are handled by the council, slippage in revenues are a result of poor design, which is why a road map for reforming the GST is needed.

I don’t envy finance minister Arun Jaitley. The fiscal situation is looking rather grim, with the fiscal deficit target amount for the entire year having already been exceeded by 12 percentage points, with a full quarter of the fiscal year still to go. Goods and Services Tax (GST) revenues, in particular, have been disappointing, with monthly collections down to the Rs 80,000 crore mark from about Rs 95,000 crore in the initial few months.

The situation on the direct taxes front appears to be better in the sense that they may just about meet their targets, but there is little chance that a part of the slippage in GST revenues could be compensated by the income and corporate tax collections. Non-tax revenues such as proceeds from disinvestment will need to play a far greater role if the fiscal deficit target of 3.2% of GDP is still to be met. There are loud rumours that the target could slip this year.

One of the key reasons the GST revenue uptake has been slipping is clearly the fact that to assuage small businesses (voters), a large number of commodities were moved from the 28% bracket to the 18% bracket, and in some cases, even lower tax brackets. In fact, as many as 178 items were moved from the 28% to the 18% slab in the GST council meeting of November 10, 2017. In addition, six items were moved from the 18% tax slab to 5% tax slab, eight items were moved from the 12% tax slab to 5% tax slab and six items were moved from the 5% tax slab to zero percent tax. All of these changes certainly have had a negative impact on revenues from GST.

These ad hoc adjustments had to be made because the GST law was so poorly designed in the first place. Several experts, including the government’s own chief economic advisor, had opined that the top rate be kept at a reasonable level, that there not be a large number of rate slabs, that commodities like petroleum, real estate be kept in the GST net and that small businesses be kept out. None of the advice was taken. We have ended up with a hugely complex, difficult to administer and even more difficult-to-comply-with GST.

But apart from the ad hoc reduction of rates, compliance issues have also had a big role to play in the declining collections. The fact is, when the GST rate is high, there is an equally high incentive to evade the tax. There is a concrete example from the European Union (EU). Until 2015, Romania had a high VAT rate of 24%, applicable on the vast majority of goods and services. At that time when Romania had this rate – one of the highest in the EU – its VAT gap, i.e., the amount of VAT lost due to non-compliance, was the highest in the EU at 41.1%. Romania cut the VAT rate to 19% from January 1, 2017. This rate cut followed the 2016 reduction from 24% to 20%. Romania had originally hiked VAT from 19% to 24% in 2010 at the height of the global financial crisis.

In India, not only is the rate of 28% inordinately high, the overall structure of the GST design is overly complex with a number of tax rates. Apart from the standard zero rate on exports, the Indian GST has several other rate slabs: 0.25%, 5%, 12%, 18%, 28%. The zero rate applies not just on exports but on a host of other products such as food items and handicrafts. With this sort of a complex structure, there is always an incentive to try to game the system by looking for loopholes in the law or other means to reduce the amount of GST payable. Even though GST is an indirect tax and in theory, its incidence ought to pass through to the final consumer, the fact is producers and service providers know that if they can succeed in lowering the tax liability, they can offer their goods or services at more competitive prices to consumers.

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