First and foremost was the fact that the taxation powers of indirect taxes were divided between the states and the Centre.
The goods and services tax (GST) is undoubtedly the most significant economic reform of recent decades. It has helped manufacturers reduce costs and compliance burden. Availability of seamless input tax credit for goods and services, barring a small list of items, reduced overall tax incidence.
Some experts raise questions on the design of India’s GST, by comparing it with simple, single rate GST of other countries like Singapore. It is quite unfair because one is comparing apples with oranges.
On the occasion of two years of GST, it would be appropriate to recall what considerations prevailed in designing India’s unique GST. The team of officers had to keep in mind so many factors while designing the GST. First and foremost was the fact that the taxation powers of indirect taxes were divided between the states and the Centre. The states were not comfortable giving up authority for collection of single GST in favour of the Centre. That being the case, the dual GST-SGST (state GST) and CGST (central GST) had to be accepted. And then came the question of how do we ensure that in case of inter-state sale, the tax paid in the origin state is transferred to the consuming state. Unique concept of IGST (integrated GST) was designed to take care of this.
Second, states’ main concern was reduction in overall revenue collection. Their dependence on tax from commodities was much higher than the Centre’s, and hence this legitimate concern. At a time when total incidence of tax on most manufactured products was more than 30%, could we have chosen a single rate of 10% or 15% for GST, that too by giving full input tax credit (ITC)? Had we done it, we would have had major combined fiscal deficits with inevitable economic instability.
Any sustainable tax reform has to create the least disturbance to revenue flows and inflation. Otherwise, the possibility of it being rolled back is quite real, as happened in Malaysia recently. GST introduced in 2015 had to be rolled back in 2018. Incidentally, the party which was in power since independence lost power.
GST was thought to have been the cause of Malaysia’s high cost of living. This need not have been true. What was probably at the root was the manner of implementation and the exercise of anti-competitive forces during the previous regime. These are the factors that may have led to price increases.
Against this is the fact that the party that introduced GST at the Centre in India came back with a strong mandate speaks volumes about the careful design of Indian GST, which did not cause revenue shortfalls or inflation. Perception is also important. A carefully planned dissemination exercise was also very much part of the GST implementation strategy.
The most important part of GST design was the four-rate structure, with extra cess on non-merit and luxury goods. Keeping 50% items of CPI (consumer price index) basket in exempt category and the rest in 5% and 12% ensured that the common man was not adversely affected. We played with all possible permutations and combinations of tax slabs before freezing this structure, which would cause no inflation or revenue loss. Also, while putting individual items in one slab, the primary consideration was that in no case should the existing tax burden exceed the post GST incidence.
Now that there is no threat of rollback of GST reform, and it is settling well, there is scope for further improvements. While states’ revenues are buoyant at 14% growth per annum, the Centre still needs to worry. The main improvement in total GST revenue will come only when the new system of return filing, which will replace existing forms 3B and 1, is implemented. The main leakage in form of taking excess ITC will only be plugged by this. The scope of this can be guessed by these figures. GST taxpayers use around Rs 4 lakh crore of ITC every month and pay around Rs 1 lakh crore in cash. Even if 10% leakage in input tax credit is prevented, the net monthly gain to the exchequer can be Rs 40,000 crore extra income per month. The GST Council will then have some scope for playing with the structure to bring down tax incidence further.
Source : https://economictimes.indiatimes.com/news/economy/policy/view-much-thought-has-gone-into-indias-unique-gst-design/articleshow/70017086.cms