GST REFORM MUST WIDEN NET

The current GST structure is difficult to administer and regressive in effect. There are also cases of prevalence of inverted duty structures under GST, where inputs are taxed at higher rates than finished goods

- Ajit Ranade

The nationwide GST was rolled out eight years ago with much fanfare in a special midnight session of Parliament. It was hailed as a landmark reform of the tax system. It unified the country as a common economic market with one system of indirect taxes, eliminating interstate frictions and also leakages.

The passage of GST reform was achieved as a grand bargain with the Union government giving up its right to impose excise and service taxes, and all the states surrendering their right to impose state-level sales taxes, value added tax and other sundry taxes such as octroi. This grand bargain and persuasion of state governments to surrender their taxing autonomy was achieved by promising them reimbursements of tax shortfalls. This is the GST compensation clause in the original Act of 2017, which expired in 2022. Now the states are afraid that they will face a steep fall in their tax share of GST.

The unified national tax system was implemented by giving up VAT, entry tax and octroi. Previously, states could adjust these taxes to meet their unique fiscal needs. Now, their ability to independently mobilise resources is curtailed and that is a cause for worry. After eight years, the GST is still like a work in progress despite the great efforts of the GST Council with representatives of all states, In this light it is very welcome that Prime Minister Narendra Modi, in his Independence Day address, announced a landmark reform of GST as a major “Diwali gift” for the citizens. He promised next-generation GST reforms aimed at reducing the tax burden on the common people, especially the middle class and MSMEs. The government's proposal revolves around three pillars: structural reforms, rate rationalisation, and ease of living.