July 15, 2021
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The Tax Tussle
To: either/view subscribers
Good morning. Are you an ardent chai lover who gets random cravings? Here’s a pro tip. Do not wander at night to grab your favourite beverage. You might get arrested!
Three Amdavadis were booked for going out in search of tea while defying the curfews. So next time you get a midnight urge, think twice before wandering off and getting arrested.
📰 FEATURE STORY
Transformational journey of GST
Recently, Goods and Services Tax marked its fourth anniversary. GST was rolled out on 1st July 2017. The tax plan was ambitious and made India one of the first countries to attempt unifying complex indirect tax systems. With unique features, the system brought in several changes to the economy and benefitted the citizens of India. While more than 66 crore GST returns were filed until June 2021, there were also severe clashes between the Centre and the State over dependency due to GST. Additionally, critics asserted that GST was widening the existing economic inequalities in the country.
Context
‘GST would begin altogether a new journey for India’, the then Finance Minister Arun Jaitley’s words marked the implementation of the new indirect cess in India four years ago. Goods and services tax subsumed most of the indirect taxes including 17 local levies, VAT and 13 other cesses.
There was a four-rate structure introduced under GST starting from 5%. The other rate slabs were 12%, 18% and 28%. Several products were classified into different slab rates and were collected at the point of consumption. A few products were also exempted from GST, in other words, were taxed at 0%.
Marking the fourth anniversary of the GST regime in India, PM Narendra Modi had tweeted that GST was a milestone in the economic landscape of India. Notably, it effortlessly pulled off an automated indirect tax system in India. However, an analysis revealed that there were many overlooked concerns. The prominent one was the constant differences between estimated and actual GST collections.
The Success of GST
As the slogan of GST, ‘One Country and One Tax’, suggested, India enjoyed the benefits of a single and simple tax system. The e-invoicing system, along with tracking through e-waybill were some of the huge success aspects of the system.
It curbed fake invoicing and also simplified calculations of tax liabilities and input tax credit. Large scale digital transformation was no easy task. Several countries across the globe had not even attempted, leave alone accomplishing such a wide digital tax transformation project.
On July 1 2021, the Finance Ministry noted that around 1.3 crore taxpayers were registered under GST. In the pre-GST era, a business entity in every state had to submit around 495 documents related to indirect tax systems. This drastically reduced to just 12 after the implementation of GST. The GST slab rates were also comparatively lower with the highest slab rate at 28%. Earlier, the total of indirect taxes on average accounted for at least 31% of tax payable.
While there were gaps between the forecast of GST revenue and actual revenue, it was pertinent to note that GST collections were on the rise for the past eight months during which they remained above the ₹1 lakh crore mark. Remarkably, the GST collections in January, March and April 2021 recorded the highest in the past four years.
Commenting on this, Anurag Thakur, the former Minister of Finance and Corporate Affairs asserted that the high GST collections despite the pandemic showed quick recovery and resilience of India’s economy.
Another feather in the cap of the system was the establishment of the GST Council. The council represented fiscal federalism by bringing together the central and state governments. Notably, the council met 44 times and discussed the challenges and solutions to better the tax system and ensured the introduction of relaxations and rationalisation of GST rates during Covid-19.
An article by Economic Times clarified that while the opinions of the stakeholders remained at two extremes, the answer on the GST success would lie somewhere in-between. Citing the large scale structure of GST, it further asserted that GST was still in the process of evolution and it would take time to reap mammoth benefits.
The increasing burden on States and Taxpayers
The report provided by the 15th Finance Commission highlighted some key concerns in the GST system. This included shortfall in collections when compared to forecast, high volatility in collections, glitches in invoice and input taxing and others. In the 2018-19 Union Budget, the GST collection was estimated to be ₹7.43 lakh crore. However, the actual collection amounted to only 78% of it. While the gap between estimated amount and collection reduced over the years, it was majorly because the budget estimate was also reduced.
The constant changes made to the GST system and the digital transformation were commendable. Yet it had left behind more confusion and chaos among the taxpayers. Similarly, the small and medium scale entrepreneurs suffered the brunt of tech developments weakened by glitches and difficulties in Input Tax Credit (ITC). In the initial years of GST, Arun Jaitley had promised to merge the 12% and 18% slab rates to reduce the number of items in high slab rates. However, the reform was delayed due to the falling revenue and pandemic.
The friction between the Centre and state governments was also widening, given the less revenue collected during the pandemic. The states compromised on independence over taxes while agreeing to the implementation of GST. However, states claimed that four years down the line the fears had multiplied while they were yet to reap even 30% of the estimated benefits.
The GST Act had guaranteed 14% growth rate in GST revenue to the states for five years. But the pandemic further reduced the overall GST collections. Notably, the meetings of the GST council were not as frequent as earlier. If the meetings were held, they resulted in disagreements, arguments and fights. Last year, the GST council borrowed ₹1.1 lakh crore to pay the states as compensation for the downfall. The Centre intended to pay the pending amount of ₹63,000 crores this year.
Apart from the defects in the GST system and falling collections, GST majorly affected the poor. The Goods and Services Tax in the form of indirect taxes resulted in widening existing economic inequalities.
This was because direct taxes like income or wealth tax varied according to the economic status of a person. However, indirect taxes did not consider the inequalities. As each person was required to pay the same tax amount, it resulted in an additional burden of tax on the poor. Unfortunately, in the total gross revenue, while the indirect taxes saw an increase, the direct taxes declined.
The pandemic pushed more Indians into poverty. The states also ran out of revenue options. Any efforts to generate revenue would inadvertently return to GST and would adversely affect the poor and drive increased inequality.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
Bhagwat’s glasnost in RSS-Muslim ties is welcome, but can he rein in Modi and Adityanath?
For the Left:
It’s time victims of UAPA demanded restitution, justice
🏴 STATE OF THE STATES
Cancer Identification (Tamil Nadu) – A mathematical model for detecting cancer-causing mutations in cells has been developed by the Indian Institute of Technology (IIT) Madras. The artificial intelligence-powered application uses a previously unexplored method of analysing DNA composition to uncover genetic variations connected to cancer progression. The researchers anticipate that the mathematical model will eventually aid in the discovery of novel pharmacological targets and the prescription of the appropriate medicine at the appropriate time.
Secret meeting (Delhi) – Prashant Kishor, a poll strategist, met former Congress president Rahul Gandhi in his Delhi residence on Tuesday, according to ANI. According to sources, senior party leaders such as Priyanka Gandhi, KC Venugopal, and Harish Rawat, the Punjab affairs in-charge, were present at the meeting. Analysts saw this as a possible meeting to discuss about the issues of Congress party in Punjab. But the party claimed that state-specific issues were not discussed.
Free! Free! (Goa) – On July 14, Delhi Chief Minister Arvind Kejriwal announced that if his party wins the state Assembly elections, each family in Goa will receive up to 300 units of free electricity per month. He went on to say, “If people in Delhi can get free electricity, why not free power for people in Goa.”
We Quit (West Bengal) – In protest against Mukul Roy’s selection as chairman of the Public Accounts Committee (PAC), eight BJP members resigned as leaders of several Assembly bodies on July 13. A legislator from the Opposition party would usually head the PAC. But Suvendu Adhikari, the Leader of the Opposition, opposed Roy’s elevation, claiming that Roy won the elections using a BJP ticket but jumped ship to TMC and could no longer be considered a legislator from the Opposition.
Most Popular CM (Maharashtra) – Nearly half of the Maharashtra voters (49%) believed CM Uddhav Thackeray’s performance was good and that they would vote for him again. Shivraj Singh Chouhan, the chief minister of Madhya Pradesh, finished second with 44% of the vote. Rajasthan Chief Minister Ashok Gehlot came in third, with 40% of voters in his state approving his performance.
🔢 KEY NUMBER
₹55,000 crore – Total amount being raised by thirty companies that had filed for Initial Public Offerings (IPO) this year in India. With 10-15 more companies waiting in the pipeline to file for IPOs, 2021 could end up as a record year for IPOs.