A Tax Reform Gone Awry

It is now four years since the goods and services tax (GST) was rolled out in July 2017. The successful transition of the states from the archaic sales tax regime to the value added tax, more than a decade earlier, was a major inspiration for the shift to the GST regime. Labelled as the biggest tax reform since independence, the GST was expected to radically alter the indirect tax structure. At the very broad level, the GST gave the union government additional powers to tax supply of goods, while it also provided the states access to the services tax base of the union government. But the GST also seriously dented the fiscal autonomy of states as it transferred a major part of their tax powers to the GST Council.

Arguably, the GST was a radical step as it shifted the incidence of taxation from the point of origin or production, concentrated mainly in industrially advanced states, to the point of destination or consumption, which is more evenly distributed across states. So poorer states were expected to post more revenues under the GST. Similarly, the amalgamation of various state and union taxes into a single GST was to end the tax-on-tax regime, or cascading effect of taxes, and reduce the overall tax burden. Another advantage of the GST is the improvement in tax buoyancy, as the interlinking of input and output taxes will minimise leakages.