Date: 15/12/2022

Relevance: GS-3: Issues relating to planning, mobilization of resources, Government Budgeting

Key Phrases: Goods & Services Tax, Indirect tax, GST Council, one nation, one tax, e-way bill, Dispute redressal mechanism, destination-based consumption taxation, e-invoice system, Appellate authority, GST Council, GST regime, Administrative mechanism, snowballing effects.

Why in News?

• Five years ago, GST was launched by the Indian government to replace the complex order of entry levies and sales tax in India.
• GST aimed to modify tax compliance and administration within the country.
• Half a decade later GST has become a lot more than just being about “One Nation, One Tax”. It is the right time to review the GST regime and implement new reforms.

Key Highlights:

• GST has been successful in many complex scenarios:
  1. GST is facilitating the free movement of goods in the country.
  2. Earlier, checkposts served as bottlenecks that not only involved a lot of waiting time but were also breeding spots for corruption — as taxes varied from state to state, city to city and even local bodies.
  3. GST acts as a transparency booster, the only requirement today at these checkpoints is the e-way bill.
• Another welcome change that came along with GST is the e-invoice system. It has now become an integral part of doing business in India.
• GST has slowly expanded the taxation base. The GST number that can track every supply chain transaction has helped to address fraudulent claims and fake invoicing.

New Reforms for GST: Need of the hour

1. GST doesn't Incorporate social and political costs:
   • The quantifiable parameters of GST success do not incorporate social and political costs, which have financial and administrative snowballing effects.
2. GST has raised issues between states and the Centre.
   • GST harms producer states and rewards consumer states in terms of revenues.
   • States like Tamil Nadu, which have invested highly in their manufacturing ecosystem, are facing new problems. With GST, their major source of income from the viewpoint of production is at stake.
3. Mandatory Compensation is not timely given:
   • The government decided to roll out compensations for five years of revenue losses for such states, the pandemic affected this plan — the guarantee of 14 per cent growth for the first five years in GST revenues choked under depleted funds.
   • Many states are thus coming together to demand an extension in these compensations because of their deteriorating finances.
4. Centre’s over reliance on Cess and Surcharges:
   • Centre has been steadily increasing cesses and surcharges to earn revenue.
   • The amplification of the Centre-state disparity after GST has put Indian federalism in a tight spot.
   • As state revenues are suffering, there is an urgent need for the inclusion of gasoline, diesel, jet fuel, real estate and electricity.
5. Dilution of State’s Taxation powers: State governments have lost most of their independent taxation powers, which has increased their dependence on the Centre.
6. GST Council functioning issues:
   • GST is monitored by a council where the states have only 2/3 of the voting rights.
   • The Centre is vested with 1/3 of the voting rights and thus many states have expressed reservations because any decision can only be made in the GST Council if it gets 75 per cent of the votes — a proportion that gives a veto power to the Centre which on the contrary can prevail if it gets the support of only 19 states.
   • Each state has the same voting right in the council irrespective of its population.
   • The decisions of the council are binding on Parliament — in contravention to the principle of parliamentary sovereignty.
7. Issues related to real estate and intermediaries:
   • Two significant structural issues in the real estate sector are with transfer of developmental rights (TDR) and floor space index (FSI).
   • TDR is a service liable for GST. Land being an immovable property, GST is not applicable to it and the benefits arising out of it. This makes TDR beyond the purview of GST.
   • Regarding FSI – which is the maximum permissible floor area that a builder can build on a particular piece of land — often, developers are granted a right of additional FSI from local municipal authorities and GST is levied upon such grants.
8. The delay in the establishment of an appellate tribunal related to GST is increasing the burden on the judiciary.
9. Gaming sector taxation issues:
   • India’s online gaming sector is one of the fastest-growing sectors in the media and entertainment space.
   • Currently with no differentiation between a game of skill and game of chance, there is a 28 per cent GST on the contest entry itself.
   • The gaming industry today attracts nearly $3-5 billion investment. An increase in this tax burden leads to a loss of investments.

Conclusion:

• Five years ago, the question was, “is the country completely ready for a single tax?” Five years later, while this question remains relevant, there is a need to ask another: We have transitioned to a “One nation, One tax”, but at what cost?

Source: Indian Express

Mains Question

Q. Examine the need for reforms in the current Goods and Services Tax (GST) regime for simplified, systematic and coherent approach towards aim of 'one nation, one tax' .( 15 marks).