The Supreme Court ruling holding the decisions of the Goods and Services Tax (GST) Council to be recommendatory, rather than binding on the Centre and the states, and that these nodes of federal power can legislate on subjects falling within their domain, brings welcome clarity on the tax. It does not undermine GST or undo the intent and purpose of the Constitution’s 101st Amendment that brought in GST. It strengthens India’s federal structure. The only damage the ruling does is to the boast that GST means one nation, one tax — in any case, GST already has seven percentage rates: 0, 3 (on gold), 5, 12, 18, 28 and 28 plus sin-good-cess.
The European Union’s common market follows harmonized administration of a value-added tax, but every member decides its own rate of tax, and the rates vary from 5% to 27% across countries and goods and services; the system works fine. Similarly, even with different rates for the same goods/services in different states, GST can work just fine in India. With all the mandatory filings, every supplier of a good or service is required to make, there is little scope for confusion over the relevant rate in a particular state, for input tax credit or payment to the government.
An overarching consideration is that when a good or service is produced in one state and consumed in another, the right to legislate on that item lies with the Centre. That leaves states with the limited right to fix rates of tax on goods made and consumed in their own territory.
Retaining this limited right is important for India’s cohesion. India is a union of states, nominally, but in reality, it is quasi-federal. If a state like Tamil Nadu, which is as large as South Korea, were to feel that its rights are being circumscribed by tax policies of the Centre, then that would make its fit into India’s polity less than comfortable. That kind of discomfort can accumulate and lead to what used to be called fissiparous tendencies.
By making it clear that states retain the constitutional right to decide what they can legislate, with respect to GST, the Supreme Court has made voluntary acquiescence into a common scheme more likely. Coerced cooperation leads to friction, reiterated the right to contestation leads to non-exercise of that right and greater cooperation.
Posturing, Not Serious Demand
Some states, especially those with Congress-run governments in office, are seeking a three-year extension of the five-year period for which the Centre would compensate the states for deemed shortfalls in GST collections. This is not warranted. It is more posturing than a serious demand.
GST collections have been growing rapidly of late; every month’s collection figures have been higher than the preceding month’s. The 14% growth assumed for state-level pre-GST tax collections, the benchmark for determining eligibility for compensation, was arbitrary and unrelated to the growth rate of the tax base, which is GDP. A transition period of five years is reasonable enough. Extending that period is only likely to deprive states of the incentive to exert themselves to realise their GST potential.
The Centre and the states have to do a great deal more to use the audit trails generated by GST to widen the tax base. For example, take synthetic cloth woven on power looms, a lot of which reportedly pays no tax. Synthetic fabric is woven from synthetic yarn, which, in turn, is made from polymers. Polymers are made by large petrochemical companies, which cannot shirk tax. It is a simple matter to find out the buyers of every kilogram of polymer and the yarn makers.
Simple input-output norms will yield how much yarn came from the polymers sold. Collect GST for that much polymer and yarn, and get the yarn makers to identify the buyers of their yarn, then of fabric, of garments. This calls for some diligent footwork and analytics, jointly by the central board of direct taxes and state-level tax departments. The result would be transformative.
Not extending the compensation period has another potential benefit. If a progressive state wants to bring down the number of rates on goods and services produced and consumed within the state to three, dispensing with the compensation cess on sin-goods would be helpful.
Expansion of Tax Base
If the tax base is diligently identified and tapped, there would be no shortfall in GST. Further, that tax base would yield higher direct tax collections as well. The Gross Value Added (GVA) by an enterprise is the sum of its gross profits and wages and salaries. The tax paid by an enterprise and the rate of tax is known quantities. Tax paid when divided by the rate of tax yields the enterprise’s GVA. The enterprise can no longer hide profits or its employee count. An efficiently implemented GST can thus expand the tax base for direct taxes as well.
The states should demand to scrap the non-shareable cesses and surcharges that the Centre levies, including on petro-fuels and replace them with shareable taxes; and seek to bring petrol fuels under GST. This would help complete the audit trails of taxation and expand the direct tax base. Estimates of tax shortfall should take into account not just GST collections, but also the rise in taxes collected by the Centre and transferred to states, such as the states’ share of income and corporate taxes.
At 17% of GDP for the taxes of the Centre and the states combined, India collects about half the OECD’s average tax collection. Efficient administration of GST can lead to a significant rise in the tax-to-GDP ratio and make a shortfall against a target of a 14% rise look irrelevant.
First published in The Federal, Sound Supreme Court judgment on the states’ rights on GST, on May 21, 2022.
About the Author
TK Arun, Senior Journalist and Columnist based in Delhi.
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