Will GST rejig rewrite history, spur consumption and growth?

Echoing the sentiment, the FinMin’s latest monthly economic report (MER) says it would bring "direct relief to households and boost consumption demand" and the RBI’s latest bulletin attributed the stock market recovery to the "optimism" it brought (along with the Standard & Poor’s sovereign credit rating upgrade of India from ‘BBB-’ to ‘BBB’ with a stable outlook).

Though the FinMin and RBI didn’t make any claims about how much boost the rejig will bring to consumption or growth, others have done so. For example, Morgan Stanley claims it would boost growth by 0.5-0.6 per cent and the SBI Research says it would boost consumption by Rs 1.98 lakh crore, translating into 1.6 per cent of GDP.

These sentiments and claims are eerily similar to the one that prevailed when the GST was launched at a grand midnight session of the Parliament in July 2017.

The Prime Minister called it a "Good and Simple Tax"; then finance minister Arun Jaitley predicted a boost to GDP by 1-2 per cent. Much before that, tax expert Vijay Kelkar had set the stage by claiming that if the GST were to be introduced it could boost GDP growth by 2-2.5 per cent and exports growth by 10-14 per cent.

Also read: GST mop-up rises 6.5 pc to Rs 1.86 lakh cr in August on higher domestic revenues

That is, the GST was projected as a growth and exports booster. But the exact opposite happened.

GST shock to economy

Then Chief Economic Advisor Arvind Subramanian was the first to blow the whistle on the GST and called it one of the “twin shock” that derailed growth; former Prime Minister Manmohan Singh later named it as one of the “twin blow” to the economy (the other being the demonetisation of 2016). These shocks pulled down the GDP growth from 8.3 per cent in FY17 to 3.9 per cent in FY20 and that of exports from 5 per cent to -3.4 per cent during the same period – even before the pandemic hit.

Would the GST rewrite its history and bring positive results this time?

Before answering that, it is crucial to first know why the GST failed in the first place – requiring a wholesome rejig, which the Prime Minister now calls “next-gen” reforms.

Why did GST fail?

The GST could have been a true Big Bang reform but it went awry because of design and implementation flaws.

The design flaws included multiple slabs. Instead of one slab (18 per cent) that the previous UPA government envisaged or three – 12 per cent (Centre plus states) covering most items with two standard rates of 17-18 per cent – that then Chief Economic Advisor Arvind Subramanian proposed in 2015, it was launched with nine rates.

These are: four main slabs of 5, 12, 18 and 28 per cent, “composite” slab of 1 per cent for self-declared informal/MSME entities, three special rates of 0.25, 1.5 and 3 per cent and a GST Compensation Cess.

It didn’t subsume all indirect taxes but only eight Central and nine state indirect taxes. High-value petrol and petroleum products, alcohol for human consumption and tobacco were left out (tobacco was later included) and so did some of the services within the real estate and electricity sectors. Inverted tax structures and multiple rates on the same base item, like 5 per cent GST on plain popcorn, 12 per cent on salted and 18 per cent on caramelized ones, have plagued the GST.

Also read: GST rates rejig: Why states have a strong case for compensation

To add to the trouble, there have been frequent rate reductions and rationalizations (Karnataka revenue minister Krishna Byre Gowda said there were 17 such exercises) that made the GST regime unpredictable and kept the businesses busy.

It wasn’t not a “Good and Simple Tax” as the Prime Minister called it.

Implementation challenges

Then there were multiple problems with its implementation.

It was rolled out with a huge compliance burden for businesses – different returns to be filled every month, every quarter and annually with both the Centre and state governments. The GST was run on an IT network (GST Network) that was under-developed, leading to refund of Input Tax Credit (ITC) without verification of vouchers – providing a fertile ground for flourishing fake ITC certificate rackets.

The ITC provision – GST paid for raw material and intermediary goods are refunded – is a big problem in itself. It led to businesses shifting from the informal sector dominated by MSMEs to the formal sector dominated by large corporations (to claim ITC certificates). Millions of jobs were lost as a large number of MSMEs shut down – adversely impacting manufacturing and growth. The exact loss was never estimated either by the government or academic institutions.

If the GST actually lowered the tax burden on corporations or consumers was never assessed – and hence, not known.

GST impact on tax revenue

Budget documents show, the Centre’s indirect tax collections fell marginally – from 46.3 per cent of gross tax during pre-GST fiscals of FY12-FY17 to 45 per cent during the post-GST fiscals of FY18-FY26 (BE). On average, during FY18-FY26 (BE), the GST accounts for 27 per cent of the Centre’s gross tax, the same as that of the personal income tax and one percentage point lower than that of the corporate tax.

The marginal impact on the Centre’s indirect tax (GST is an indirect tax) is primarily because it continued to generate more indirect tax revenue by imposing higher customs duty (import barriers) and oil taxes (the GST didn’t subsume all indirect taxes).

Also read: GST rejig: These household items likely to get cheaper

Yet for years the Centre projected the GST as a money spinner (revenue booster that it wasn't), every now and then showcasing its “record” collections to deflect criticism of GST and showcase robust growth in consumption and the economy, despite multiple economic shocks like the demonetisation, GST and the pandemic.

The impact on states was studied by the finance ministry's think tank, the National Institute of Public Finance and Policy (NIPFP), for the period of FY19-FY24.

Published a study a few days ago, it showed without the GST Compensation “apart from a few years and states”, State GST collections as a percentage of nominal State GDP (GSDP) fell “short of the revenue subsumed into the GST” in the base year of FY16 (GST was adopted in July 2017). Only Maharashtra managed to do so in five of six fiscals.

With GST Compensation, the performance improved but only Haryana and Maharashtra managed to achieve the pre-GST ratio in all six fiscals; none in five or four fiscals; Chhattisgarh, Gujarat and Madhya Pradesh achieved in three fiscals and Odisha not even once.

What this implies is that without a fresh round of GST Compensation, states will lose more revenue due to the rejig.

The Centre would also suffer (Centre and states share GST equally) but the Centre has wider power to mobilise tax, non-tax (like dividend), capital receipts (disinvestment, privatisation and sovereign borrowing etc.) – as against little or no such powers for states – to fill the revenue gaps.

Will GST rejig now boost consumption?

The GST was supposed to bring down indirect tax burden not just on corporates but also consumers. In fact, it was envisaged to eliminate the cascading effect of multiple indirect taxes that both the Centre and states imposed.

What exactly happened is not known.

Few know that a National Anti-profiteering Authority (NAA) was built into the GST at its launch precisely because the government feared that businesses may not pass on lower tax rates to consumers.

What the NAA achieved, apart from issuing orders to pass on the rate cuts, is not known, but it was merged into the Competition Commission of India (CCI) in 2022 in the name of administrative efficiency and in 2024, the CCI washed off its hands by saying anti-profiteering was not its core function.

Now, the government proposes to re-introduce the NAA in the GST 2.0 to ensure tax cuts are passed on to consumers.

While the final GST rate cuts and rationalization is subject to the approval of the GST Council, meeting in New Delhi on September 3 and 4, the GoM on the matter approved to merge most items in the 12 per cent slab to 5 per cent slab, most items in the 28 per cent slab to 18 per cent slab and impose 40 per cent tax on some of the ‘sin goods’ in the 28 per cent slab.

Arun Kumar, former professor of economics at the Jawaharlal Nehru University, said the GST rejig will lower consumer prices if the businesses pass it on and not profiteer.

“Sometime it happens, sometimes it doesn’t. The GST Council should monitor it if states fear that it may not happen”, he added.

Kumar argued that the current exercise would benefit the formal sector and cause loss to the informal or unorganised sector because of the ITC provision – just as it happened soon after the GST was introduced in 2017. Since poverty is entrenched in the informal or unorganised sector, a large population may not be benefitted much, he asserts.

He drew attention to Jaitley’s statement of September 2017 that 95 per cent GST was paid by 5 per cent of the firms registered on the GST portal, while the remaining 60 lakh registered firms accounted for the remaining 5 per cent. That is, the GST is largely paid by the formal sector. (A few months later, Jaitley had also said that 35 per cent of registered entities paid “mostly nil or negligible” GST.)

How many registered firms now pay GST is not known but the old situation is more likely to persist – as indicated by the ‘composite tax’ (1 per cent GST) applicable to goods manufacturers with Rs 1.5 crore annual turnover and services providers with Rs 50 lakh turnover.