IASbhai Daily Editorial Hunt | 1st SEP 2020
There is only one thing that makes a dream impossible to achieve: the fear of failure.– Paulo Coelho
EDITORIAL HUNT #118 :“Must Needed GST Reforms | UPSC“
Vijay Kelkar and Ajit Ranade
Must Needed GST Reforms | UPSC
Vijay Kelkar and Ajit Ranade are, respectively, Vice-President and Member, Pune International Centre
GST reform needs a new grand bargain
The GST compensation issue strengthens the necessity for a new system between sovereign and sub-sovereign entities
SYLLABUS COVERED: GS 3 : Taxation
The GST design needs a radical overhaul in midst of the pandemic . Substantiate -(GS 3)
- GST Reforms
- Comparison With Australian GST
- A Comprehensive Structure Of GST
- DEFINITION : The States gave up their right to collect sales tax and sundry taxes, and the Centre gave up excise and services tax.
- INTRA STATE : The nationwide GST promised frictionless commerce across State borders .
- CASCADING EFFECT : The focus was on buoyant and leakproof tax compliance, and removal of inefficiencies like the cascade of “tax on tax”.
This historic grand bargain was the result of painstaking consensus building, which inter alia involved addressing the apprehension of States, of revenue loss due to the GST.
ABDICATION OF RESPONSIBILITY
- STATES CONCERN : Their consent was secured by a promise of reimbursing any shortfall in tax revenues for a period of five years.
- GST CESS : This reimbursement was to be funded by a special cess called the GST compensation cess.
- FILLING GAPS : The promised reimbursement was to fill the gap for an assured 14% year on year tax growth for five years, and it was generous to a fault.
- HARMONISING TAXATION : But that was not the only fault with the design, which had also failed to learn from the successful design of harmonising Value Added Tax (VAT) rates across the nation, implemented just a decade ago.
- MAKING ROOM : But that tapered over the years, making room for incentives for tax effort from the States, sort of “skin in the game”.
- HIGH EXPENDITURE : As the economy battles a pandemic and recession, the tax collection has dropped significantly, while expenditure needs are sharply higher.
- MEETING SHORTFALLS : But it seems that the States have been told that they are on their own to meet the shortfall in revenues.
THE ONUS IS ON THE CENTRE
- FEW OPTIONS : The States do not have recourse to multiple options that the Centre has, such as issue of a sovereign bond (in dollars or rupees) or a loan against public sector unit shares from the Reserve Bank of India.
- BORROWING RATES : The Centre can anyway command much lower rates of borrowing from the markets as compared to the States.
- INDEBTEDNESS : In terms of aggregate public sector borrowing, it does not matter for the debt markets, nor the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
- MACROECONOMIC STABILITY : Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilisation, which is the Centre’s domain.
- TRUST DEFICIT : COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.
THE AUSTRALIAN EXAMPLE
- COMPENSATION : Just tinkering with the compensation mechanism, or frequently changing rate slabs, or to earn revenue that is not shareable with the States, is not the way forward.
- COMPACT DESIGN : What we instead need is a Grand Bargain 2.0 between the sovereign and the sub-sovereign entities.
- STANDARDISED RATES : That widening of the tax base itself will allow us to go back to the original recommendation of a standard rate of 12%, to be fixed for at least a five-year period.
A comparison with Australia which also coincidentally shares its GST anniversary with India, is apt.
- AUSTRALIAN SLAB : For the past two decades their GST rate has been constant at 10%.
- INDIAN SLAB : Of course India’s single rate of 12% has to cover petrol, diesel, electricity, transport and real estate as well.
- EXTRA ROOM : Some extra elbow room for the States’ revenue autonomy is obtained by allowing the States non VATable surcharges on a small list of “sin” goods such as liquor, tobacco etc.
- AVOIDING RNR : Incidentally this redesign will scrupulously avoid the bogey of a “revenue neutral rate” (RNR) which needlessly occupied the attention of lawmakers and officials.
Of course the compensation-cum-reimbursement incentive can remain, but more in the nature of what was done for VAT harmonisation.
THIRD TIER OF GOVERNMENT
- UNDERSTANDING DECENTRALISATION : This new grand bargain must recognise the increasing importance of the third tier of government.
- LOCAL GOVERNANCE : Even after 28 years of the 73rd and 74th Amendments, the local governments do not have the promised transfer of funds, functions and functionaries.
- STRESSED STRUCTURE : These local bodies face increased responsibility of providing government services especially in view of increased urbanisation and decentralisation.
- IMPROVED GOVERNANCE : The quality of governance improves as also, the tax base is better aligned with responsibilities of various tiers of government.
- The current system is too complex and burdensome.
- We also need to zero rate exports.
- We need to strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth.
A new grand bargain is needed.
SOURCES: THE HINDU EDITORIAL HUNT | Must Needed GST Reforms | UPSC