GST has been a success, increased tax transparency: Madan Sabnavis, Care Ratings
Formalisation is a big benefit, though even today there are exemptions under the composition scheme. But by linking all transactions to GST to claim benefits on input credit, the system has worked very well, says Sabnavis.
The GST law, one of the much-touted economic reforms of the government, completes a full four years on July 1, 2021. How has the regulation been for the economy? Is the economy far better off or is it shaken up a bit? Also, what is required to be to further bolster the regime for the betterment of the economy? ETCFO explores these questions with Care Ratings’ Chief Economist Madan Sabnavis. Edited excerpts:
Q: How is your assessment of the four years of the GST? Is the law a success or a failure?
Madan Sabnavis: I would tend to think that GST has been a success as it has standardised rates across the country and hence from the point of view of individuals who finally pay all the taxes there has been transparency.
However, from the point of view of the government, it has created challenges as when it was drawn up it was never assumed that the economy would degrow or slow down sharply. But this has happened, leading to anomalies with respect to tax collections.The helplessness can be seen from last year when the compensation to states ran into problems. This entire formula of compensation needs to be looked at again and reworked as the five-year period is too short to gauge the efficacy of the same.
Q: The GDP was supposed to be lifted by 1-2 per cent due to the introduction of the GST. That hasn’t happened yet…
Madan Sabnavis: In my opinion, I never agreed with this concept that GST can raise GDP growth because for growth to take place we need more jobs and GST cannot do that. Standardised tax rates for commodities cannot lead to higher consumption by definition because finally, it is income that gets linked to jobs.
Q: What do you think have been the key GST benefits for the economy so far?
Madan Sabnavis: Formalisation is a big benefit, though even today there are exemptions under the composition scheme. But by linking all transactions to GST to claim benefits on input credit, the system has worked very well.
Q: What according to you are the missing links in the GST regime today? Could the rates have been better simplified?
Madan Sabnavis: I don’t think anything is missing in the rates. Yes, ideally we need to have just one rate, which is not possible today given that such a goal can be achieved after the system stabilises.
Q: Is cooperative federalism under threat or shaken?
Madan Sabnavis: It has been questioned is what I would say. But there are solutions and the Centre worked it out well last year to ensure that the states got compensated with the Centre borrowing. But that bit has to be reviewed and extended as what was assumed when GST was brought in does not hold now. States can no longer assume their revenue will grow by 14%.
Q: Are technology glitches natural to expect with such an overhaul change even after four years?
Madan Sabnavis: These are challenges which can be surmounted and hence not an issue. The issue is with ideology.
Q: Last, what can be done for the betterment of the regime?
Madan Sabnavis: We need to include other products like fuel and sin products under GST. By keeping them out and charging higher VAT/excise we have actually created a system that spurs inflation.
Q: How is your assessment of the four years of the GST? Is the law a success or a failure?
Madan Sabnavis: I would tend to think that GST has been a success as it has standardised rates across the country and hence from the point of view of individuals who finally pay all the taxes there has been transparency.
However, from the point of view of the government, it has created challenges as when it was drawn up it was never assumed that the economy would degrow or slow down sharply. But this has happened, leading to anomalies with respect to tax collections.The helplessness can be seen from last year when the compensation to states ran into problems. This entire formula of compensation needs to be looked at again and reworked as the five-year period is too short to gauge the efficacy of the same.
Q: The GDP was supposed to be lifted by 1-2 per cent due to the introduction of the GST. That hasn’t happened yet…
Madan Sabnavis: In my opinion, I never agreed with this concept that GST can raise GDP growth because for growth to take place we need more jobs and GST cannot do that. Standardised tax rates for commodities cannot lead to higher consumption by definition because finally, it is income that gets linked to jobs.
The only way that GST could have helped GDP is in integrating the informal economy and revealing certain output which may not have been captured by the regular process of using proxies for this sector..
Q: What do you think have been the key GST benefits for the economy so far?
Madan Sabnavis: Formalisation is a big benefit, though even today there are exemptions under the composition scheme. But by linking all transactions to GST to claim benefits on input credit, the system has worked very well.
Q: What according to you are the missing links in the GST regime today? Could the rates have been better simplified?
Madan Sabnavis: I don’t think anything is missing in the rates. Yes, ideally we need to have just one rate, which is not possible today given that such a goal can be achieved after the system stabilises.
The problem is more on how states can be compensated and the inflexibility that comes in when the economy slumps and tax revenue gets impacted..
Q: Is cooperative federalism under threat or shaken?
Madan Sabnavis: It has been questioned is what I would say. But there are solutions and the Centre worked it out well last year to ensure that the states got compensated with the Centre borrowing. But that bit has to be reviewed and extended as what was assumed when GST was brought in does not hold now. States can no longer assume their revenue will grow by 14%.
Q: Are technology glitches natural to expect with such an overhaul change even after four years?
Madan Sabnavis: These are challenges which can be surmounted and hence not an issue. The issue is with ideology.
Q: Last, what can be done for the betterment of the regime?
Madan Sabnavis: We need to include other products like fuel and sin products under GST. By keeping them out and charging higher VAT/excise we have actually created a system that spurs inflation.
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