Paradoxical prosperity

The gross Goods and Service Tax (GST) revenue collected in the month of August, 2023 was Rs 1,59,069 crore which was 11 per cent higher than the GST revenues in the same month last year, claims a press release of the Ministry of Finance. The major components of this tax revenue were: Central GST Rs 28,328 crore, State GST Rs 35,794 crore, and Integrated GST Rs 83,251 crore. IGST also included Rs 43,550 crore collected on import of goods and cess of Rs 11,695 crore (including Rs 1,016 crore collected on import of goods).

The government release also highlights that the Centre settled Rs 37,581 crore and Rs 31,408 crore in August 2023 towards CGST and SGST, respectively, out of the IGST collections. The remaining revenue of the Centre and States after making regular settlements in August 2023 works out to Rs 65,909 crore for Central GST (CGST) and Rs 67,202 crore for State GST(SGST).

Though August GST collections were higher compared to the same month last year, compared to July 2023, the GST revenue collection has declined. The GST collections for July 2023 were Rs 1, 65,105, which was higher compared to June 2023. But the August 2023 GST collections have fallen back to Rs 1,59,069 crore. Nonetheless, it is observed that there has been a steady and consistent rise in GST collections since April 2023. Last month’s GST collection recorded crossing Rs 1.4 lakh crore for eighteen months in a row and crossing Rs 1.5 lakh for the ninth time since July 1, 2017.

An analysis of state-wise GST collection data for August 2023 reveals that the GST collection in Tripura recorded the highest Y-o-Y rise of 40 per cent. It was followed by Arunachal Pradesh and Ladakh scoring equally a growth of 39 per cent, Nagaland at 37 per cent, and Goa at 36 per cent. Among the larger states, Maharashtra recorded the highest GST collection for August 2023 in value terms at Rs 23, 282 crore (growth 23 per cent). States such as Karnataka, Gujarat, Tamil Nadu, Haryana, Uttar Pradesh, and West Bengal have also shown exceptional numbers in GST collection similar to the past months.

One nation, one market, one tax

The idea of a nationwide GST in India was first proposed by the Kelkar Task Force on Indirect taxes in 2000. The objective was to replace the prevailing complex and fragmented tax structure with a unified system that would simplify compliance, reduce tax cascading, and promote economic integration.

The Empowered Committee of State Finance Ministers prepared a design and roadmap, releasing the First Discussion Paper in 2009. The Constitution Amendment Bill was introduced in 2011 but it faced challenges regarding compensation to states and other issues. After years of deliberations, the Constitution (122nd Amendment) Bill 2014, was introduced in the Parliament. The Bill aimed to amend the Constitution to enable the implementation of GST. The Bill was passed by the Lok Sabha in May, 2015, and with certain amendments, it was finally passed in the Rajya Sabha and thereafter in the Lok Sabha in August, 2016. Furthermore, the Bill was ratified by the required number of states, received the assent of the President on September 8, 2016, and was enacted as the 101st Constitution Amendment Act, 2016. The GST Council was notified w.e.f. September 15, 2016. It came into force on July 1, 2017.

The GST system follows a dual structure, comprising Central GST (CGST) and State GST (SGST), levied concurrently by the Central and State governments, respectively. Additionally, an Integrated GST (IGST) is levied on interstate supplies and imports, which is collected by the Central Government but apportioned to the destination state. Under GST, goods and services are categorised into different tax slabs, including 5 per cent, 12 per cent, 18 per cent, and 28 per cent. Some essential commodities are exempted from GST, Gold and job work for diamonds attract low rate of taxation. Compensation cess is being levied on demerit goods and certain luxury items.

GST being a consumption-based tax, few manufacturing states feared huge loss of their state revenue due to adoption of the new tax structure. The Union government ensured the states that the government would compensate those states if any revenue losses occurred. For this, a GST Compensation Fund was created and a GST Compensation Cess was levied by the Goods and Services Tax (Compensation to States) Act 2017. The object of levying this cess was to compensate the states for the loss of revenue arising due to the implementation of GST on 1st July 2017 for a period of five years or such period as recommended by the GST Council. In the 49th GST Council meeting, it was decided that all GST compensation dues that were pending for June 2022 (when the compensation cess regime ended), amounting to Rs 16,982 crore, would be cleared immediately.

Regressive GST undermines federalism

It is reported that since the Goods and Services Tax (GST) compensation period ended, and the Union Government turned down the demand of the states to extend the protected revenue period beyond June 2022, the state governments have been forced to raise funds from the narrow avenues remaining open to them. The Karnataka government has estimated a loss of Rs 26,954 crore in GST collections for 2023-24 due to the discontinuation of the GST compensation from the Centre, while Punjab has termed it as a significant fiscal risk for the state and has predicted a possible ‘fall-off-the-cliff” situation. Chhattisgarh might lose as much as 4 per cent in annual revenues on account of discontinuation of the GST compensation. The state governments, under electoral pressures and with fewer revenue sources, are imposing higher taxes on property, liquor, and even vehicles to meet the shortfall. While states such as Tamil Nadu, West Bengal, Karnataka and Kerala have relied on increasing excise duties on alcohol to boost their revenues, Goa has hiked taxes on property and infrastructure to fund its expenditure on public utilities, reports Moneycontrol.

Large states like Punjab, Madhya Pradesh, Rajasthan, West Bengal, and Andhra Pradesh have incurred an average fiscal deficit of above 3.5 per cent of GDP. Seventeen states have state debt-to-GDP higher than the aggregate average of 27.9 per cent as of 2022-23.

In this power tussle between the Union and State governments on the revenue collection rights, the citizens bear the burden of additional tax. The GST, which also aimed to improve cooperative federalism among the states and the centre as a long-term goal, has only succeeded in creating a gradually widening trust deficit among India’s federal framework. The way GST has been designed and implemented has systematically undermined the federal structure of India.

Study finds that the Indian indirect tax system is very regressive. According to the Oxfam report (2023), ‘Survival of the Richest: The India Story’, published one day before the World Economic Forum (WEF) annual meeting, the bottom 50 per cent of the population at an all-India level pays six times more on indirect taxation as a percentage of income compared to top 10 per cent. As per their estimate, a little less than two-third (64.3 per cent) of the total GST collected in 2021-22 came from the bottom 50 per cent population, one third from the middle 40 per cent and only three to four per cent from the top 10 per cent.

Not surprisingly, in response to the Oxfam report, the Government of India claimed that 90 per cent of GST was collected from 22 per cent of GST payers, comprising large businesses with a turnover of above Rs 50 crore, reports Mint. However the government was silent on whether those business houses had borne the tax burden themselves or passed on the tax burden to the end consumers who ultimately paid higher prices as the final retail price usually ‘includes all taxes’!

Low income, coupled with high tax, has compelled the majority of the Indian citizens to curtail their expenditure. NSO data shows, during April-June 2023, expenditure rose by only 1.4 per cent though production grew by 7.8 per cent. Growing differences in consumption patterns among super rich and common citizens are also reflected in the increased import content of domestic expenditure, which is up from 22 per cent before COVID to 26 per cent. With the help of an overrated exchange rate, rich Indians are buying global brands in Zurich, Milan, and Singapore – while the vast majority struggle to buy necessities. This higher value of import contents of domestic expenditure also gets reflected in the increased IGST and cess collection from imported goods.

Increasing dependence on indirect tax

Tax data reveal that in the financial year 2017-18, when the GST was implemented, the share of direct taxes was almost more than half of the gross tax revenue receipt of the Union government. It was 52 per cent of the gross tax revenue. It gradually declined to 47 per cent during the financial year 2020-21. During the financial year 2021-22, it is estimated that the proportion of direct tax to the gross tax revenue would stand at 49 per cent. In 2012-13, direct tax GDP ratio

was 3.93 per cent and indirect tax GDP ratio was 3.53 per cent. In 2022-23 the direct tax GDP ratio declined to 3.56 per cent but the indirect tax GDP ratio increased to 3.94 per cent

Similarly, revenue from corporate taxes as a percentage of gross tax revenue had declined during this period. It was 32 per cent of the gross tax revenue during the financial year 2017-18, which decreased to 24 per cent during 2020-21. In 2021-22, the proportion was at a slightly higher projection at 25 per cent, reports The Wire.

Over the years, the corporate tax rate has decreased in India. The government lost a little over Rs 1 lakh crore in 2020-21 on account of a cut in corporate taxes. In September 2019, the government announced a cut in base corporate tax for then existing companies to 22 per cent from 30 per cent; and for new manufacturing firms, incorporated after October 1, 2019, to 15 per cent from 25 per cent. Interestingly, Wealth tax was abolished on 28 February 2016, during the presentation of the Union Budget 2016-17. It was replaced by the 2 per cent surcharge on taxable income of over Rs 1 crore.

Need for a progressive tax regime

Various studies have observed that rising wealth and income inequality can be corrected through progressive taxation. It is one of the least distortionary policy tools available that control the rise in inequality by redistributing the gains from growth. Imposing a tax on the wealth of the richest 10 per cent has been advocated by Oxfam for years. The rationale behind this has been that the wealth accumulation by the creamiest layer of the country is massive, and taxing it can generate huge revenue, which can then be redirected to the development of the social sectors of the country.

It is argued that the wealth tax is likely to be the most direct and powerful tool to restore tax progressivity. Steep rise in wealth tax shall narrow the gap between the top ten per cent and bottom fifty per cent.

Conclusion

In 2023, the G20 theme was ‘human-centric progress’ which is only possible if the governments take proactive measures to reduce the growing wealth and income inequality among the citizens through implementation of a progressive tax structure. The government should reintroduce wealth tax to mobilise sizable revenue for social welfare projects to reduce the income and wealth inequality gap.

GST as an ‘one nation one market one tax’ has been proved very regressive as the ultimate burden of such indirect tax is passed on to the consumers. Moreover GST has weakened the federal structure of India’s political system, making the states dependent on the mercy of the Union government.

Views expressed are personal