States, all grown up about GST now

With the Centre okaying the final tranche of GST compensation to states, the new tax regime will have cast aside its infancy support. Some states may find the adjustment tricky. But nationwide monthly GST revenues have stabilised at about Rs 1.5 lakh crore with scope for improvement through rate rationalisation and widened coverage. The weighted average tax rate has been declining since GST was introduced, a process that can be reversed by reducing exemptions and correcting duty inversion. Compensating states for revenue losses on account of switching to GST has contributed to the movement of the weighted average tax rate farther away from the revenue-neutral rate. Now, there should be greater urgency for course correction.

The decision to set up the GST appellate tribunal will also address administrative efficiency. GoI is in an understandable haste to incorporate it in the Finance Bill. Dispute resolution risks becoming a bottleneck in revenue mobilisation; the GST Council has finally arrived at an agreement over the composition of the overdue tribunal. The tax system needs an appeals mechanism to avoid judicial overload. It will be in the interests of the states to set up the subordinate structure close on the heels of the apex body.

The GST Council is approaching rate rationalisation with a degree of circumspection that lessens the tax’s reformative potential. There are questions over the economy’s capacity to cope with fewer tax rates. The top 28% slab is likely to endure as a policy lever to discourage conspicuous consumption in a developing economy. The low hanging fruit is reducing the three other slabs – 5%, 12% and 18% – to two. The Centre and states share apprehension over bringing fuel into GST. As it is taxed now, fuel delivers revenue for climate mitigation. Bringing it within GST and imposing a separate carbon tax to fund, say, energy transition should smoothen the process.