GST reform needs more than rate cuts. The ball is in court's court

Copyright © HT Digital Streams Limit all rights reserved. Finance Minister Nirmala Sitharaman at the 56th GST council meeting. Eight opposition-regular states requested the center to set up a group of ministers (glue) to revenue losses arising from the GST rationalization. (PTI) Summary GST rationalization indicates a shift in India’s tax policy, with the aim of simplifying the pages and increasing efficiency. However, key reforms such as including fuel and alcohol remain silent, amid the revenue tension of the middle state and the need for states to investigate new sources of income. The latest rationalization of GST pages has sent a quiet but significant signal: Tax rates are no longer untouchable. In the past, governments have hesitated to fidget many tax rates on the assumption that a bird in hand is worth two in the forest. This also applies to both direct tax-where corporate taxpayers have benefited much more than the individual salary taxpayer and indirect tax that falls on the end consumer. The introduction of the Regime for Goods and Services (GST) in 2017 replaced a maze of excise and turnover tax with a uniform nationwide tax and double taxes through input tax credit eliminated. But its success was a cost: a complex structure of five-platelates and an expensive promise to compensate states for income losses, funded by additional loans and a compensation on consumers. The current restructuring goes a way to fix it, but it is not a complete solution. While the weighted average tax appearance of GST will fall below 10%, most of the collections, by more than 65%, will still come from the 18%page, which is quite high. Several pages have historically created classification disputes, blocked working capital and delayed cash flow for MSMEs and exporters. A cleaner tariff structure facilitates these frictions, but leaves greater problems untouched. The most difficult reforms – the petroleum and alcohol under GST – stopped. After the sunset of the compensation, the GST and GST volusions have now become the largest source of income for states. But fuel and alcohol remain seconds. States are clearly not yet convinced of the consumption effect of lower taxes enough to abandon these revenue sources. The current restructuring will put extra pressure on states to find alternative sources of income. According to the credit rating agency ICRA, SGST Plus tax development is more than half of the total revenue receipts of the states. Since the income will not be uniform in states, “any income preceded by the center and state governments will be compensated by other revenue streams or rationalization of expenses,” the report states. This brings up the other important obstacle in the way of further rationalization and reduction of GST. Since GST is a destination tax, with revenue that has at the point of consumption, producer statements benefit relatively less than consumer statements. Of course, the scale is still important. Large producer statements such as Maharashtra, Gujarat, Tamil Nadu and Karnataka, which have a higher average income and large populations, are ahead. But in the whole, the GST system is weighed into consumption according to design. This, as the center has discovered through bitter experience in the GST Council, where each state has an equal voice, becomes very difficult to reach any consensus, given the sharp diverse interests of producers and consumer states. A consumer-heavy state such as Arunachal Pradesh is very dependent on central devolution-to 72% of its income. For Bihar it is about 60% and for Uttar Pradesh it is about 50%. Producer statements such as Haryana, Tamil Nadu, Maharashtra, Gujarat and Telangana depend on devolution for less than 20% of their total revenue receipts. This is at the heart of the political economy challenge of GST rationalization. GST is not just a tax – it is a contract between the states and the center. The center needs the states on board to achieve any rationalization. The states need security of income and an insurance of fair disorder before they will compensate any further tax powers. States generate about 40% of turnover and carry 60% of expenses. However, the center takes a larger part of the revenue raised, as about 23% of the central government’s revenue comes from strike and surcharge, which does not end up in the divisible pool of funds. By the 41% share of states envisaged by the Finance Commission, the actual devolution is about 32%. Of course, states want fixed guarantees, such as the GST compensation, before giving up more control. States, on the other hand, have done little to explore new and innovative ways to increase revenue and prefer to rely on fruits with low hanging such as alcohol and fuel taxes and stamp duty. Even in the case of stamp duty, there is a great space for improvement. According to a World Bank study, the realization of the stamp duty is about 0.2% of GDP compared to 1.1% in OECD countries. States can increase more on their own by reforming property taxes, asset-monetization, market-driven user costs for services, and better price discovery and capturing natural resources. And part of the appreciation of land value due to government infrastructure creation, roads, subways, etc. – Another way to collect extra resources. To achieve a real simple and efficient GST structure, states will have to lift their part of the weight. The next phase of reform depends on it. Catch all the business news, market news, news reports and latest news updates on Live Mint. 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