GST- Critical analysis of its working

  • IASbaba
  • January 21, 2020
  • 0
UPSC Articles
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Economy: Education

Topic: General Studies 3:

  • Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
  • Government Budgeting

GST- Critical analysis of its working


Goods and services tax (GST) that was introduced in India in July 2017 has been widely criticized as having failed to deliver the benefits that were expected of it especially in the backdrop of low GDP growth rate.

What were the basic expectations (benefits) from GST regime?

  • Integration of the Indian marketplace
  • Creation of scale efficiencies and 
  • Enhanced gross domestic product (GDP) growth 

There is no systematic study yet of the first two, while GDP growth has slowed in the past few years.

It is wrong to blame GST regime alone for the present state of economy as multiple players are responsible for the state of affairs. Some of the other factors are:

  1. Technology was the biggest let-down during the rollout and this was handled by a private-sector entity. Blaming the government for technological issues is uncalled for.
  2. Revenues of local bodies going down after GST introduction was blamed on GST regime as some of the local taxes were subsumed under GST

Counter Argument: State Governments have been reluctant to devolve funds to local bodies. They have been quite delinquent in constituting finance commissions and thus formulating rules for the devolution of financial revenues to local bodies

  1. Shortfall (relative to expectations) in GST collections is now being blamed, in part, on lax supervision and oversight.

Counter Argument: The decision to rely on self-declarations and filings, rather than on oversight and supervision, was deliberate. It was meant to provide time for businesses to adapt to the new regime.

  1. Tax rates are high with multiple slabs: The Arvind Subramanian committee pegged the revenue-neutral GST rate at 15%

Counter Arguments: When the new tax was launched in July 2017, the rate was 14.4%, and over the next two years, it had come down to around 11.6%. The number of items taxed at the highest GST slab rate of 28% had come down from 226 in July 2017 to a mere 28

Further, several key categories of goods remain outside the GST’s purview. 

Thus, far from being a deterrent to economic activity, the GST had acted as a countercyclical fiscal policy too

What then is the reason for slowdown?

  • Exemptions granted to various businesses from having to pay the tax, the composition schemes made available to small businesses and weaker economic activity have contributed to slower growth in GST revenues.
  • Rural Sector Slowdown due to bad monsoons in consequent years
  • Banking Sector Crisis

So is GST all fine and has it not added to economic difficulties?

GST still has certain issues and where GST might have contributed to the country’s overall economic difficulties is in the services sector.

The number of forms that service producers have to file has increased considerably. In part, this is because of the separate registrations needed in each state, as opposed to the single registration pre-GST

With the services sector being the Indian economy’s biggest, the increased complexity and difficulties faced by service providers might have overshadowed the efficiency gains that accrued to goods and logistics providers

Way Forward

  • Rates would be adjusted only once in a year, which is agreed to by GST Council. This ensure tax predictability thus enhancing ease of doing business.
  • Forms and returns needs to be simplified.
  • Exemption limits for the filing of GST could be raised further without any impact on revenue

Connecting the Dots

  • Direct tax code
  • GST regime and its impact on Federal fiscal structure

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