GST @5
The fifth anniversary is a reminder of how India, despite hiccups, has successfully negotiated the tricky idea of 'One Nation, One Tax'. EPISODE #80
Dear Reader,
A very Happy Monday to you.
Last week India logged the fifth anniversary of its experiment with ‘One Nation, One Tax’. Indeed, this marquee tax reform is a moment of celebration. Even though the experience is a cup half-full, it is apparent that the powerful idea which transformed a federation of tax geographies into an economic unity has taken root.
So this week I explore the GST experience and the outlook. Do read and share your feedback.
This week’s cover picture is from what is the centre of the earth: Nanyuki, Kenya. It is courtesy Rahul Sharma who is enjoying wildlife up close and personal. Thanks to Rahul I revisited my basic geography and physics lessons to comprehend some of the phenomenon that guides our beautiful and fascinating planet.
A big shoutout to Abhijit, Niranjan, Gautam, @bhatnaturally, Premasundaran, Vandana, Mathew, Yugainder and Pankaj for your informed responses, kind appreciation and amplification of last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
ONE NATION, ONE TAX
Five years ago India had another tryst with destiny at midnight on 1 July, 2017. This time to usher in a new era of indirect taxes. At its core the Goods and Services Tax (GST), a consumption tax, economically unified the country. It replaced an inefficient structure managed by what is best described as tax satraps, which in turn provided the perfect environment to nurture the toxic mix of red-tape and corruption—making Indian industry that much less competitive.
It was the most marquee tax reform ever that many among us believed had little chance of succeeding in a country so complex and bedevilled with red tape and corruption.
Indeed, GST was an extraordinary example of national ambition driven by a rare bipartisan political consensus. Yet, five years later the ayes have it.
One very obvious metric to measure its success is revenue receipts.
After a shaky start, collections were up and away; at least that is till the covid-19 pandemic struck the world and India in 2020. But as the graphic below shows, collections rebounded once the worst of the covid episode was behind us.
This tabulation is unorthodox as it tags discrete points of time; I used July as the reference month since that was when GST was launched.
As is evident the collections curve has an upward trajectory and is presently averaging around Rs140,000 crore every month—what FM Nirmala Sitharaman described on Friday as the new normal for GST collections.
Why GST?
The obvious question is what is so special about GST?
The short answer is that GST is a uniform indirect tax levied on the supply of goods and services at the point of consumption; if implemented to plan then it will be a win-win for all stakeholders: Business, Consumer and Government.
This is because:
It eliminates cascading of taxes and thereby improving efficiency of business processes;
As GST is managed on an IT backbone it enables easy compliance and business less vulnerable to harassment by corrupt tax officials;
Enables One Nation, One Tax, which in turn reduces transaction costs, improves efficiency, eliminates red-tape and corruption and economically unifies India;
Reduces the cost of domestically manufactured goods, making Indian exports that much more competitive.
The inherent structure of GST is such that it improves tax buoyancy by reducing leakages and improving production efficiency.
To make this operational the complex indirect tax structure needed to be recast. It would mean that both the union government and the states would have to sacrifice some of their tax sovereignty.
Consequently, this meant subsuming central taxes:
Central excise duty;
Additional excise duty;
Service tax;
Additional customs duty.
Similarly, the states too gave up their right to impose:
State Value Added Tax;
Sales tax;
Entertainment tax;
Octroi and Entry tax;
Purchase tax.
This pooling of sovereignty was a precondition to GST. Not only did it enable the marquee tax reform it also created a new trust quotient template between the centre and states by inking an equal partnership—it is a relationship where the sum of the parts is greater than the whole.
The GST timeline
Given the enormity of the heavy lifting required it is no surprise that the rollout of GST took nearly two decades to happen.
I have crunched the timeline to highlight the fact that the tax reform is backed by bipartisan political consensus—a rarity in the chaos of Indian politics—having been blessed by both the national parties, the Congress and the Bharatiya Janata Party (BJP), during their tenures at the helm.
The last mile was clinched after the NDA-led by Prime Minister Narendra Modi decided to guarantee an assured growth of 14% in GST revenues to states for the first five years after it was rolled out. Not only did it address the fiscal insecurities of the states it implicitly signalled the centre’s faith in the indirect tax.
Another Bargain?
Unless you are partisan, there is only one view of the GST experience so far: a cup half-full.
Indeed it is a work in progress, but to suggest it is a failure—as some quarters argue—is so off the mark. Yes, the covid-19 pandemic and the Russia-Ukraine war has severely tested the GST experiment by hurting revenues. Now these external shocks are a new variable that the GST Council will have to take into consideration when they take a view on a recalibration of the existing structure.
Now that India has proved “yes we can” it is time to take the initial experience and fill the gaps—extending GST to alcohol and petroleum products, both of which were excluded as part of the grand bargain, and shrinking the number of tax slabs.
I published a piece arguing my case for another grand bargain in the Economic Times, published coincidentally on the fifth anniversary of GST.
Sharing a key part of my argument below:
“Both sides could explore a compromise by first acknowledging that there is no magic fiscal stick to make the current problems go away.
While GST revenues may have stabilised, unplanned economic shocks are now a reality. Given the back-to-back economic shocks—first triggered by the once-in-a-century pandemic and more recently by the Russia-Ukraine conflict—the GST Council, the apex body shepherding the indirect tax reform, may well consider creating a crisis fund to deal with the unknown-unknown.”
“Another grand bargain is par for the course. The first phase was to enable the transition.
Even though the GST structure is still a work-in-progress, it is safe to conclude that the central government and states should be happy with their effort.
In fact, both sides have been putting off taking tough decisions to fix the challenges in the GST structure - especially with respect to multiplicity of rates and the fact that petroleum products and alcohol, both of which are major sources of revenue, are presently outside the purview of the GST.”
If you wish to read the column please click this link.
My point is very simple. There is a lot that the Centre and states can give and take—the former can offer to share some of the cesses they impose and the states can agree to GST being extended to all commodities—as they script a new chapter in their partnership.
Indeed this is easy to argue but extremely difficult to implement. But five years ago our political class showed the world and us that such a compromise for national good is eminently doable.
Time for an encore.
Recommended Reading/Viewing
I am returning you to the cover picture for this week to dwell on the significance of Nanyuki, located in Kenya, in explaining the phenomenon that is our planet.
Specifically I am referring to the Coriolis effect: it explains the path taken by objects as they move through the atmosphere, which in turn helps us comprehend the weather patterns—including the ongoing Monsoon season over India.
I am sharing a vlog which explains this effect for a lay person. Please click the link below if you wish to watch it.
And then you have the more scientific explanation from National Geographic. It begins with a general comment:
“The Coriolis effect describes the pattern of deflection taken by objects not firmly connected to the ground as they travel long distances around Earth. The Coriolis effect is responsible for many large-scale weather patterns.
The key to the Coriolis effect lies in Earth’s rotation. Specifically, Earth rotates faster at the Equator than it does at the poles. Earth is wider at the Equator, so to make a rotation in one 24-hour period, equatorial regions race nearly 1,600 kilometers (1,000 miles) per hour. Near the poles, Earth rotates at a sluggish 0.00008 kilometers (0.00005 miles) per hour.”
And then spells out the significance of the Coriolis effect:
“Now let’s pretend you’re standing at the North Pole. When you throw the ball to your friend, it will again appear to land to the right of him….it’s because he’s moving faster than you are and has moved ahead of the ball.
Everywhere you play global-scale "catch" in the Northern Hemisphere, the ball will deflect to the right.
This apparent deflection is the Coriolis effect.
Fluids traveling across large areas, such as air currents, are like the path of the ball. They appear to bend to the right in the Northern Hemisphere. The Coriolis effect behaves the opposite way in the Southern Hemisphere, where currents appear to bend to the left.”
In short the Coriolis effect explains compelling weather patterns like the annual Indian Monsoon.
Till we meet again next week. Stay safe.
Dear Anil,
A crisp and informative article on GST, which is a comprehensive, multistage and destination based tax. As you rightly say it is work in progress, a lot has been achieved but we have miles to go ....The time line of GST given by you is so clear, I have shared your article with my students who are making a project on GST for the Class XII board exams.
The unplanned economic shocks like the War , destruction due to natural calamities, pandemics create hiccups in the implementation no doubt, but still we are doing well as far as the revenue collections are concerned.The recent announcement by the government that sale of our National Flag is exempt from GST is also a welcome step.
The video was very interesting.The local people of Kenya demonstrated the coriolis effect so well with a plastic jug , bowl and few sticks!! Innovative way by locals to encourage tourism and earn money also by giving the certificates of being at Equator!!
GST without any doubt, has been the best taxation reform in our country. By a single legislation, it became much more easier to distribute and sell goods, in the entire country. Previously, each State collected their sales tax separately, for billing in their State. The rate of tax for the same goods was often different in different States, leading to movement of goods, from one State to the other. The sales tax department of each state was issuing C forms for inter State sales. The companies had to maintain branch offices/godowns in each state for billing of local sales tax paid goods. Many Districts would have Octroi collection points, leading to delay and increase of costs. GST has been the solution to millions of businesses, to cut costs and delay. Paper work has been reduced and the purpose of revenue collections for the Center and States has become better. It is a win win situation for all. It is another matter that opposition ruled states will raise objections and obstacles, even in an ideal situation. The revenue can increase further if the flow of goods without bill/ cash transactions are more closely monitored. Great reading Anil. Keep us updated.