Since the beginning, the policy-makers knew that the Goods and Services Tax (GST) should have minimal slabs and rates. Yet, political compromises, which are not economically or fiscally sound and efficient, needed to be made. So, India was stuck with five slabs. Only now has the Government decided to reduce them to two. Of course, as expected, the higher number of rates led to major problems for commercial entities which have often been swamped by the burden of compliance. In addition, it re-opened the doors for massive corruption and tax evasion, something which was prevalent in the pre-GST era, and something which GST was aimed to eliminate.
Each year, during business conclaves and similar gatherings, industry leaders appealed to the Government to simplify the rules and procedures. Each year, there were scores of real-life stories of how small enterprises shut shops because they simply could cope up with the complex compliance requirements. Opposition parties and leaders repeatedly targeted the Government for mishandling GST, leading to large scale closure of small and medium enterprises.
Each year, the Government promised to take steps to simplify the regime. Finance minister Nirmala Sitharaman has often gone on record with announcements to make GST both business and consumer friendly. A major step was taken in this year’s Union Budget when major procedural reforms were announced. But as is wont with Indian bureaucracy, it has an incredible capacity to complicate even the reforms, and confound businesses.
Kapil Mahan, a chartered accountant, wrote an article after the FM’s Budget. He said, “The GST amendments… present a mixed bag. While initiatives like IMS (invoice management system) are steps towards a more transparent tax system, retrospective disallowance of ITC (input tax credit) and increased compliance obligations could hinder business operations. A collaborative approach involving stakeholder consultations and phased implementations may mitigate adverse potential impacts, and ensure that the GST framework evolves into a more business-friendly regime.”
Anyone who has seen the bureaucracy in action realises that this form of reforms is a challenge, no matter what the intentions of the political leadership are. Then there is the more politically significant task of sending the right signals to the aspirational middle-class voters, who have been largely behind the electoral success of Narendra Modi and the BJP-led NDA since 2014.
Cutting across caste and ethnic identities, this vote bank of nearly 400 million people has climbed up the prosperity pole. In recent years, however, stagnant incomes and high food inflation have dampened sentiments. C Voter surveys have shown that about two-thirds of people in this category find it difficult to manage household budgets, and run families.
Perhaps this was one reason for the underwhelming performance of the ruling party in the 2024 Lok Sabha elections. The leadership hopes that the proposed two rates of GST around Diwali, with most items of daily or regular use coming in the 5 per cent bracket, will boost this aspirational class. It is a work in progress, and as much a political statement as an economic one.
In the overall scheme of things, one needs to admit that GST has been a truly transformational change. Finally, India, with a plethora of taxes and rules, has become a unified market. Companies do not have to employ armies of accountants to keep track of the different taxes in different states. Revenue has gone up. In 2017-18, GST collections were Rs 7.15 lakh crore. By 2024-25, they had shot up to Rs 22 lakh crore. It is an unexpected bonanza.
Compliance, though complex, has improved. More businesses are registered, though one can argue this is because the unorganised sector is in disarray. India is a unique country in the world in the sense it is still quite poor in terms of per capita income, and yet deploys massive welfare schemes like free food for 800 million citizens. Along with direct taxes, it is the buoyancy in GST revenues that is financing these welfare measures.
Like it or not, welfare schemes and cash transfers tweak the electoral equations in the favour of the ruling regimes. Yet, figures indicate that evasion is massive. In the past five years, GST officials claim that they found evasion of Rs 7 lakh crore. There are examples to indicate that despite GST, and tax reforms, past business practices to evade and avoid taxes continue. Huge tax changes have happened on the ground. Below the surface, things have remained the same.
The author has worked for leading media houses, authored two books, and is now Executive Director, C Voter Foundation