It could be the right time to make GST a 'Good and Simple Tax'

Goods and services tax (GST) collections appear to have bounced back smartly in June, with the easing of lockdown. But three years after India’s most transformative tax regime was rolled out, GST has some way to go before it can become a ‘good and simple tax’ that will yield a bounty in revenues and bump up growth substantially. The revenue-productivity of GST, with consumption as the base — a key indicator of the tax’s efficiency — is low. It is estimated at about 0.35, against the global average of 0.45, reflecting a messy tax structure and weak administration. GoI must use its political capital to fix the flaws and reform the tax structure. The Covid-19 lockdown-induced slowdown has dented collections as people are spending less on things like fine dining, travel and clothes — discretionary consumption items are the largest contributors to the GST base. This has led to a slide in State GST (SGST), Integrated GST (IGST), half of which accrue to states, Central GST (CGST), 42% of which devolves to states, and the GST cess, meant to compensate states for revenue shortfall due to the transition. Put simply, the dip in collections has left the states struggling for funds to provide healthcare, support to people and economic relief. RBI’s Consumer Confidence Survey in May showed that consumers reported sharp cuts in discretionary spending compared to March. It did not expect much improvement in the coming year. The slide is due to the abrupt disruption in earnings, uncertainty about future earnings on the demand side, and supply constraints due to lockdown. Spending on essential items has, thankfully, stayed afloat. But their contribution to the GST kitty is relatively small. Will the shift away from discretionary spending become a habit? Will ‘work from home’ make people spend less on eating out, fancy clothing and automobiles? While it makes sense for individuals to save during tough times, there is bound to be some pent-up demand that may fuel consumption once the lockdown is completely lifted. However, if people save more at this stage by curtailing their discretionary spending, it would force companies to cut back production and exacerbate the slowdown. The lockdown should be fully lifted to meet this pent-up demand and to restore jobs. This must be supplemented by GoI spending its way out of the slowdown. Following the Keynesian formula to tackle the problem of economic and employment stagnation due to weak demand is the right thing to do now. Government spending must also focus on vastly improving the healthcare infrastructure in Tier-2 cities. Consumers should regain confidence to spend when GoI spends for industry, and for public investment, to boost demand, making the case for a larger stimulus compelling. Most stimulus packages across the world have been in the form of direct cash transfers to provide continuity in the income stream for those who have lost their jobs so that they can buy essentials, pay their rent, etc. More income support to the poor will certainly help. Higher public investment to create jobs and incomes will leave more money in people’s hands and help raise discretionary consumption in India. Many discretionary consumption items attract the higher GST rates. A reduction in rates will spur demand, and may even the enable government to recoup some lost revenues. GoI must not worry about a breach in fiscal deficit target now. Today, the private sector is fighting for survival, and a large dose of public investment will crowd in, rather than crowd out, private investment. Resurgent economic growth will augment GST revenue. The experience of other countries shows that reforms to converge GST rates, scrapping exemptions and widening the base will improve collections. India has too many rates now, and some are too high. Take cars that attract the peak GST rate of 28%, with an additional cess of 1-22% depending on the length, engine size and type of vehicle. The same holds true for vital intermediate products such as cement. The GST Council should lower the incidence of tax for all items — except ‘sin goods’ like alcohol and tobacco — that attract the highest slab. They should be lowered and converged, ideally to three rates to start with, to make compliance easy. Big data analytics must be deployed to track audit trails and check evasion. Nearly half the economy remains outside GST, underscoring the need to quickly include petroleum products, real estate and electricity duty under ambit of the levy. A Pune International Centre policy paper by V Bhaskar and Vijay Kelkar (bit.ly/2ZIeMQJ) recommends institutional strengthening of the GST Council and for the Centre to deliver on its promise to make the compensation payout to states. This makes eminent sense. Removing the clutter and inefficiencies in GST will help raise revenue productivity and collections. Why not a white paper on GST reform?