3 Years of GST: Has It Proved to be ‘Galat Salat Tax’, After All?

3 years & a pandemic have given us enough data to show that GST, in its current form, is a failure.

Remember what the pundits told us about GST – that it will add at least 2 percentage points to India’s GDP growth rate? Now you can look back and laugh. Or cry. Whichever suits your mood. Because if this is what GDP growth looks like after GST, then we were better off without it.

Three years ago, Modi government ignored the naysayers and pushed GST through. Of course, one reason was that the NDA ruled most states and could steamroll its way through the GST council. But even opposition states had a reason to fall in line. They were all guaranteed an annual revenue growth of 14 percent, over what they had earned in 2015-16. Any shortfall was to be topped up by the centre for the first 5 years. That is, till 2022.

Where would the centre get the money to compensate states? From the additional tax imposed on luxury goods and vices, such as very large SUVs, cigarettes, pan masala, aerated drinks and coal products. The centre builds a corpus from this ‘compensation-cess’ and transfers what is due to the states.

Centre Owes States a Lot of Money

India’s economy has been doing so badly, for the past few years, that not a single large state has managed to hit the 14 percent revenue growth target. In 2019-20, amongst the bigger states Madhya Pradesh and Karnataka managed to improve their GST collections by more than 10 percent. Telangana’s collection increased by 9.4 percent, Maharashtra’s by 9.2 percent, West Bengal’s by 9.1 percent. Most others saw their GST collections rise by 6-8 percent.

Of course, the lockdown has completely disrupted GST collections for these two months. The centre’s collection of CGST dropped 87 percent in April to just Rs.5,934 crore.

States would have collected a little more than that, which is peanuts when compared to increased coronavirus-driven expenses. That is why state finance ministers have been pushing the centre to release their compensation dues as soon as possible.

The bad news is that even the affluent and the addicted didn’t buy enough of ‘demerit’ and ‘sin’ products for the centre to earn enough compensation cess. That is why, even though the Modi government committed itself, by law, to pay compensation every two months, it sat on state dues. Compensation for December-January, which should have been released in February was paid in April, and the money due for February-March was finally paid in June. It is not clear when the dues for the lockdown period of April-May will be released to states.

• Three years ago, Modi government ignored the naysayers and pushed GST through.
• States were guaranteed an annual revenue growth of 14 percent, over what they had earned in 2015-16. Any shortfall was to be topped up by the centre for the first 5 years, till 2022.
• Not a single large state has managed to hit the 14 percent revenue growth target.
• It is not clear when the dues for the lockdown period of April-May will be released to states.
• It has taken a virus to expose this fatal flaw of over-centralisation in India’s GST architecture.
• GST is inherently skewed against the unorganised sector.

Alcohol to the Rescue?

Desperate state governments have turned to the only avenue open to them to raise revenues – alcohol and fuel. That is why, alcohol vends were the first to be opened after the lockdown was relaxed, and several states sharply raised taxes on alcoholic drinks. Most state governments have also raised VAT on petrol and diesel, to make up for their GST losses on other goods and services.

The net result is both health and economic hazard. The WHO has asked governments to discourage drinking alcohol in the time of COVID-19, since it can reduce immunity and increase comorbidities. Indian state governments have no option but to push alcohol sales. The IMF has recommended that governments give tax-breaks to consumers and businesses. Presumably, this includes cutting taxes on crucial inputs and essentials. Indian states – along with the centre – are doing the exact opposite, by hiking taxes on fuel. All this, because the GST regime has tied their hands.

GST is Skewed Against Unorganised Sector

It has taken a virus to expose this fatal flaw of over-centralisation in India’s GST architecture. Most state governments were aware of the anti-federal nature of the law, but the carrot of a guaranteed 14 percent revenue growth bought their acquiescence. Now, when the centre is delaying compensation payments, all that states can do is to write long plaintive letters to the Modi government.

There is a bigger problem with GST, that remains opaque to public discourse. It is inherently skewed against the unorganised sector, and is thus bound to destroy jobs. It has always been an open secret that small, unorganised manufacturers and service providers in India, survive because they don’t pay their full share of taxes.

GST a Bigger Destroyer of Unorganised Sector Than DeMo?

Itinerant carpenters, plumbers, electricians, whose mobile phones stand-in for an office address, manage to work for cheap because they don’t have to pay service tax. Small manufacturers compete with brands because they don’t fully account for their sales. Even the local kirana shop manages to stay afloat against the deep pockets of ecommerce and organised retail, by giving you kachcha receipts. The moment they have to pay taxes at the official rate, they will be beaten out of the market, by organised players.

It is these unorganised sellers of goods and services who account for over 80 percent of employment in India.

GST has already cost them a significant part of market share. That’s because a company that buys goods and services from a vendor who doesn’t pay GST loses out on input-credit. Limits on daily cash transaction, under the GST regime, also discourages companies from engaging people who cannot provide official GST-registered invoices.

This is why GST has turned out to be a bigger destroyer of unorganised sector jobs than even that economic catastrophe called demonetisation. There have been some changes made to accommodate small businesses, but they are still not enough. Three years and a pandemic have given us enough data to show that GST, in its current form, is a failure. It is broken, and needs a complete overhaul.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets@AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)