The goods and services tax (GST) will require attention from the new government that comes in later this week. First, GST must improve its coverage. Today, real estate and electricity are outside its ambit. While the Centre and states have decided to delay bringing petroleum formally under GST, they have agreed to continue levying excise and value added tax (VAT) duty on it. There is a case for bringing aviation turbine fuel (ATF) and natural gas into the GST net. The revenue implications for the states are not very significant, and the impact is confined to a few states.
Second, real estate must be brought under GST. At present, only the construction segment is subject to it. To cover the entire value chain, GST needs to cover land, construction of buildings and sale of completed constructions.
There is now a broad consensus that including land and real estate does not require a constitutional amendment and that the ‘right to use’ land and the construction and sale of constructed property can all be treated as ‘deemed supply of services’. This measure can strike a blow to black money generation and clean up the land market. While there may not be any significant revenue gains on the GST side, since input duty credit would largely nullify the payment of GST on the output duty services, it will boost revenues of direct taxes.
Electricity is another area that should be brought under GST to boost the manufacturing sector. There is a misconception that doing so would lead to an increase in power tariffs. On the contrary, it would help to offset duties levied on capital goods and input goods and input services. In the case of electricity supply, the embedded taxes account for a significant percentage (about 8%) of the tariff value, largely due to taxes on raw materials (coal and renewable energy) and equipment (solar panels and batteries.) There would be some revenue loss to the states. But this would be a small price to pay to make Indian manufacturing more competitive.
Expanding the taxable base of GST would also make the task of rate rationalisation that much easier. It is possible to move from the present five-rate structure under GST to a three-rate one by merging the 18% and 12% slabs into a 16% duty slab. We could then have a rate structure of 0%, 5%, 16% and 28% plus cess. Once the revenue picks up, the cess could be phased away, and a 40% duty rate put in place for demerit goods, as suggested by former Chief Economic Adviser Arvind Subramanian in his GST report.
A single-rate GST structure is a utopian idea. It would require raising the duty rate on a number of merit goods that are presently levied at 5% to the standard rate.
Procedural complexity issues need to be addressed. Ease of doing business includes ease of paying taxes. Once invoice matching is introduced, it may be necessary to revisit the decision to generate an e-way bill. The new government also needs to revisit the dispute resolution system. One area of improvement is to take out minor offences from the domain of disputes by listing them, and levying administrative fines instead of penalties.
Finally, a new institution to address the institutional void at the state level must be created. A GST secretariat is needed in every state to address the day-to-day non-policy issues relating to GST’s implementation. This forum can bring central and state officials together to hear grievances of trade and industry. This can become a registered body with a dedicated secretariat, much like the empowered committee of state finance ministers.