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Arvind Subramanian on India having missed its chance to rationalise GST rates — ‘moment has passed'

Speaking at an event, the former CEA says he no longer thinks fuel & electricity should be included in GST and added that India has only now, 7 yrs later, reached pre-GST revenue levels.

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New Delhi: Former Chief Economic Adviser Arvind Subramanian, who was actively involved with the ministry of finance during the implementation of the Goods and Services Tax (GST) in 2017, said he does not think there will be any further rationalisation of the GST rate structure.

India may have missed its chance for a simplified GST by not making the required changes at the founding moment, he added. The spirit of cooperative federalism that existed at that time has now eroded, with GST now an “object of acrimony and recrimination” between the Centre and the states.

Speaking at an event Thursday, organised by the Centre for Social and Economic Progress on seven years of GST, Subramanian added that he no longer thinks it is a good idea to expand the GST base by bringing petroleum and electricity under its ambit. He reasoned that it is not politically advisable to ask states to give up more sovereignty over their revenues than they already have.

Talking about GST reforms, he said they are “deeply necessary” but “highly unlikely to happen”. 

“We ain’t going to get GST rate structure rationalisation going forward. It is a bold prediction I am making,” he said.

Subramanian was the head of the committee that was tasked with recommending a GST rate structure for the country. The committee had recommended a two-rate structure, where the bulk of the goods and services would be taxed at a ‘standard rate’ of 17-18 percent and few would be taxed at a ‘low rate’ of 12 percent. 

Together, this would have yielded a ‘revenue neutral rate’ of 15-15.5 percent. The revenue neutral rate is the average rate at which the tax incidence would have been the same pre-GST and after its implementation.

The final GST rate structure is far more complex than this, with several exemptions being provided for, apart from a multiple-rate structure of 5 percent, 12 percent, 18 percent, and 28 percent. In addition to this, particular goods like gold (3 percent) and diamonds (1.5 percent) have unique rates under GST, while luxury and ‘sin’ goods attract a cess over and above the top rate of 28 percent. 

Neither a good nor simple tax

In his speech, Subramanian noted that when Prime Minister Narendra Modi had inaugurated the GST on 1 July, 2017, he had called it a “good and simple tax”. However, he said, the “irony is that… simplicity we have left far behind and good in terms of revenues, we are only (now) back to where we were pre-GST”.

The former CEA added that these are the situations where the ‘founding moment’ becomes very important and it is the failure of the political leadership that the GST structure is complex. 

Terming the cess rates as “monstrous”, Subramanian said India is, in fact, going in a backward direction in terms of simplicity and rationalisation. “You should just have one cess rate, one standard rate and one low rate.”

Also Read: Embarrassment of riches? Govt halts monthly GST releases as high collections ‘creating resentment’

Missed the founding opportunity

“At the founding moment we had a chance to keep it simple. And it is the failure of political leadership… I think it could have been done. Let’s not forget the ruling party at the Centre and most of the states were from the same party and, at the founding moment, had we insisted on simplicity we could have got that done. We lost that moment…I think it’s gone,” he added.

Subramanian also said that while he had earlier argued that both petroleum and electricity should become part of GST, he is now of the view that this would be a bad idea because it will not be politically advisable to expect or ask the states to give up more sovereignty, especially when the relations between the Centre and the states is “acrimonious”.

Replying to a query on the working and independence of the GST Council, which is chaired by the Union Finance Minister and has representations from all states, he said that the current political climate has led to a deterioration of the spirit of cooperative federalism and, therefore, has affected the functioning of the council.

“Let’s not be in denial…the functioning of the GST Council has been informed by the broader political context of centralisation…kind of heavy handedness on the part of the Centre which has made the GST an object of acrimony and recrimination,” he said. “And we can’t change that.” 

He added, “Therefore, I think we are stuck in this equilibrium… because we lost that spirit of cooperative federalism that went into the founding of the GST, that moment has passed.”

Revenues only now at pre-GST levels

The economist also said that the revenues from GST have only now attained pre-GST levels. 

He said that while gross revenues have seen strong growth over the years, it is only now that actual revenues (after refunds have been accounted for) accruing to the government have converged with pre-GST levels. 

“Gross collections show GST surging and exceeding pre-GST from inception,” he said. “However, net revenues show that only now after 7 years pre-GST levels have been reached...since we did not have access to this (refund) data, we were under the impression that revenues were doing very well, surpassing pre-GST levels.”

Subramanian pointed out that the decline in GST revenues was because the GST Council went on a rate cutting spree from late 2017 to 2019. He said that the rates were slashed based on gross collections because refund data was not published. 

“Had the refund data been published, we would have been much more careful about this (rate cutting)... So revenues are only today back to pre-GST levels because we embarked on this rate cutting spree,” he said, adding that revenues performance of the system has not lived up to the expectations.

However, he did add that GST has worked broadly on expected lines to benefit the poorer states.

Also Read: Unproductive speculation, rising household debt — SEBI, RBI’s concerns about India’s F&O market

States’ compensation big blow to Centre

In the run-up to the rollout of GST, one of the major motivators to the states to join the new indirect tax system was that the Centre promised to compensate them for any loss of revenue that would arise from GST for a period of five years from its rollout. 

It was assumed that the states would see a 14 percent growth in their revenues every year, and so any shortfall in this was to be compensated by the Centre.

This compensation — which was funded through a compensation cess on luxury and sin goods — meant that the Centre has forgone substantial revenues amounting to 0.5-1 percent of GDP every year for the past seven years, Subramanian pointed out.

Going forward, now that the compensation period is over, he suggested that the cess should be folded into the regular rate structure, strongly opposing calls to eliminate the cess. 

He added that compensation to states should not be restored as it was always meant to be temporary and states have had enough time to adjust. He also said that nearly all states will see an increase in revenues in the future.

(Edited by Radifah Kabir)

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