GST 2.0: is it the right time? And what kind of reforms do we need?

The tumultuous years of implementation goods and services tax (GST) in India appear to be over. This indirect and transaction-based tax, introduced nationwide in July 2017, has taken hold. Most of the start-up issues, such as “bill matching” issues and late repayments, which lasted for years, have largely been resolved. The contentious issue of states not receiving their constitutionally mandated compensation during the peak Covid period has also been resolved.

At the GST Council meeting last month, the Indian government said it would soon pay out the pending balance to the states – Rs 16,982 crore for June 2022, the final installment – ​​even though the compensation fund was empty. . GST collections are back on track. Revenue mopped up last month – Rs 1,49,577 crore – was a 12% jump year-on-year. For the April-February period of the current financial year, the Collection of GST did not slip below Rs 1.4 lakh crore even once, a significant threshold given that it plunged to a paltry Rs 32,172 crore during the lockdown-hit April 2020, before rebound to Rs 1 lakh crore in October, after six months.


As GST collection becomes robust – a result of broadening the tax base and obstructing leakages – now is a good time to usher in the next phase of India’s most ambitious tax reform. . So what kind of reforms should be part of GST 2.0?

Pratik Jain, tax partner at Price Waterhouse & Co, says that “streamlining rates (reducing the current four tax brackets of 5%, 12%, 18% and 28% to just three) and subjecting petroleum products to the tariff structure of the GST” should take priority in taking reform to the next level. On petroleum products, he said, while a consensus on passenger fuel would take longer, the GST Council should start by including aviation turbine fuel (ATF) and natural gas. Now, petroleum products and certain items such as electricity and alcohol are not covered by the GST.


According to Jain, two areas require the Council’s immediate attention – the formation of a GST appeals tribunal and closer coordination between central and state GST authorities for the audit. The Council, chaired by the Union Finance Minister with his state counterparts as other members, is the supreme decision-making body in matters of indirect taxation in India. The Council, for its part, has begun deliberations on further reform measures. Its 49th meeting held in New Delhi last month discussed the establishment of an appeals tribunal. It adopted the report of a group of ministers with some modifications. “The final draft amendments to the GST laws will be circulated to Members for comment. The President has been authorized to finalize the same,” reads the official statement released after the meeting.


According to EY India’s tax partner, Saurabh Agarwal, the GST Appeal Tribunal could be headquartered in Delhi with regional benches in Mumbai, Kolkata, Chennai, Bengaluru, Ahmedabad, Prayagraj, Chandigarh and Hyderabad, as “it may not be possible to implement in all states in the initial phase”.

According to a recent report by Press Trust of India quoting an unnamed official, a four member appellate tribunal with two technical members (one officer each from the Center and States) and two judicial members is proposed to be set up in each state. The establishment of an appeal tribunal will reduce litigation and reduce court costs for litigants.


“From a short to medium term perspective, the next stage of GST reforms should aim for prompt resolution of disputes and reduction of ongoing litigation,” says Vikas Vasal, National Managing Partner – Tax, Grant Thornton Bharat.

“The focus should be on the creation of appellate tribunals, the introduction of faceless assessments similar to those of the income tax system and an amnesty program to resolve existing disputes, many of which occurred due to misinterpretations or minor non-compliances in the first years of TPS,” he says, adding that from a long-term perspective, the focus should be on expanding the scope of the GST and on bringing all goods and services within its scope.


However, Sushil Modi, a former deputy chief minister of Bihar and a politician who headed the empowered GST committee before the implementation of the tax scheme, says the GST no longer needs sweeping reforms. “What it takes is a bit of tweaking. With good income growth and inflation under control, now is a good time to reduce the number of GST tiles at three. There should be a slab between 12% and 18%, and another between 5% and 12%,” he says, adding that the highest slab (28%) should remain as it is.

An EY report published last year, “GST Transformation: The Road Ahead”, suggests a rationalization of tariffs according to the following formula: “Move to a three-tier tariff structure of 8 (merit rate), 15 (rate standard), 30 (rate rate) percent by merging 12 percent and 18 percent into a 15 percent bracket and increasing the demerit rate from 28 percent to 30 percent. The report also indicates that the 30% slab can be raised to 40% after the compensation tax is abolished.


The GST, which included 17 major taxes and 13 taxes, has four bands plus a list of exemptions (eggs, curds, vegetables, etc. attract no tax). Luxury and sinful items attract the maximum tax of 28%. An additional tax is levied on items such as tobacco, soda water, caffeinated beverages and certain motor vehicles, in addition to the 28% tax slab, to fund the corpus of compensation needed to support states that do not have failed to pay off the GST at an annual growth rate. 14% or more. The compensation was only intended for the transition period between July 2017 and June 2022.

While states no longer receive compensation, tax collection continues and will continue through March 2026. Tax collection was extended to fill the revenue shortfall resulting from the pandemic, when the Center resorted to borrowing (Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22). The tax varies from item to item – for example, pan masala attracts a 60% tax and pan masala containing tobacco a whopping 204% tax.

According to an RBI report on state finances released in January, the top 10 recipients of GST compensation during the five-year transition period were Maharashtra, Karnataka, Gujarat, Tamil Nadu , Punjab, Uttar Pradesh, Delhi, Kerala, West Bengal and Madhya Pradesh. . The report indicates that the states and union territories likely to be most affected after the withdrawal of the compensation are Pondicherry, Punjab, Delhi, Himachal Pradesh, Goa and Uttarakhand, in this order, in as a share of the GST offset in their tax revenue. was 10% or more on average.


However, after analyzing revenue figures for a 10-month period from April to January of FY22 and FY23, Jain concludes differently: “Uttarakhand, Himachal Pradesh, Karnataka and Gujarat have been able to sustain a growth rate of over 14% despite stopping the GST offset.States such as Delhi, Uttar Pradesh and West Bengal seem to be the most affected by the stopping of GST. compensation.

The very concept of compensation was woven into the GST scheme to woo recalcitrant producer states such as Maharashtra and Gujarat. Many of these producing states enjoyed higher incomes because of the origin-based tax system that was in place before the GST. With offsets gone, how will states adapt to the new regime and reform to mop up a solid income? After all, it was clear from day one that the GST offset was only a temporary measure.

“Ultimately, states must become self-reliant. To increase revenue, states should try to plug tax leaks and exercise tighter control over compliance,” says Jain.


Economist and former chief statistician of India Pronab Sen adds that the loss suffered by the states due to the withdrawal of GST compensation is something that “needs to be considered by the Finance Commission”. A new set of reforms must be launched to make the GST simple and transparent.

Deloitte India tax partner, MS Mani, however, says that it is essential to stabilize GST with minimal changes during the year as every change requires change in IT systems, product pricing, plans business etc. “It would be nice if all the changes discussed and approved during a financial year were introduced from April 1 of the following financial year in order to give companies time to prepare and be ready for the same. he says.

Perhaps a series of changes could be bundled together and introduced all at once. GST 2.0 is essential, but it should be deployed with minimal disruption.

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