GST has been a game-changing reform, says Piyush Goyal as tax system completes one year

Just ahead of the first anniversary of the implementation of the Goods and Services Tax (GST), union finance minister Piyush Goyal spoke to R Sukumar and Shishir Gupta of Hindustan Times on what he termed a “game-changing reform”. Edited excerpts:

What are your big learnings from a year of GST?

There is no comparable example anywhere in the world where a country the size of India has embarked on implementing GST across 29 states, seven Union Territories; different political parties with different ideologies running different states. In that sense, it was a very bold move and after one year I get a sense of satisfaction that the effort has paid off.

The original idea was in the 2000s when the NDA (National Democratic Alliance) government under Atal Bihari Vajpayee suggested it, but it did not find acceptance among all states and political parties ( over the following decade) — amongst other reasons because the trust was missing in states on the central government’s intentions. One cause for this, which I’ve often talked about, is that the Central Sales Tax, CST compensation, which the Congress government had promised to give to the states had not been given. Prime Minister (Narendra) Modi and (then) finance minister Arun Jaitley went about it systematically . They earned the trust of the states, paid all the compensation of earlier years, took a consensus approach — all decisions related to law policies, procedure frameworks, rates are unanimous, and everybody’s concerns have been addressed.

Through the year, we have been nimble-footed. Whenever decisions need to be taken to simplify, correct any anomalies, give relief to certain sections of business and trade, we took those. We reduced rates on around 400 items; many items were made tax-free. It’s a demonstration of India’s federal structure at its best. It’s a demonstration that we can make bold and powerful reform decisions in this country. It’s a demonstration that PM Modi is trusted, even by governments of opposition parties.

The collections that have come in so far truly give us the satisfaction that there has been a move towards formalisation of the economy; there has been a move towards a greater degree of simplification. Instead of 40 laws being administered and different inspectors coming for sales tax , excise, service tax, octroi, entry tax and so many others... 17 taxes and 23 cesses have been subsumed in one tax. To my mind it’s a game changing reform, the benefits of which will accrue for decades and decades.

The chief economic adviser recently said that the 28% slab should go. What are your thoughts on this?

First of all, the original idea of GST rates was to fix them within the nearest slab of the existing rates pre-GST. Because we had to ensure that there was no loss of revenue. In addition we had committed a 14% increase CAGR (compound annual growth rate) in their (states’) revenue. And if there was a shortfall, the centre would have had to make good.

In the first instance, we have kept the rates closest to the original ones. Clearly, we needed different slabs because there are goods which only the rich consume — where you needed a high rate. There are goods which the poor consume, where you wanted to keep it very low and in many cases, a zero rate.

Having successfully implemented this — as I said we have already reduced rates on around 400 items; many items in the 28% slab have seen their rates brought down; around 50 items I think — there are a few items in the 28% slab. GST is an evolving tax and we are sensitive to market demands, subject to how the collections move.

In the long run, it is everybody’s desire that the rates come down. This government is one which believes that as much as we can, we should give relief to the people of India.

There has also been some talk of reducing the number of slabs...

I think these are all decisions that we can’t take sitting in Delhi. These are decisions to be taken by the GST Council.

There have been several glitches and implementation issues. You simplified some of these procedures. Right now, there is a lot of concern over the annual returns...

There is a committee working on the simplification of the entire process and also looking at changes in the software. I’m expecting that report very soon. It will be put up before the GST Council. We are going to see more and more simplification of the process. As far as possible, we’ll make sure smaller traders and smaller manufacturers are given greater relief. As you are aware, we have not yet implemented the reverse charge mechanism...

Or the invoice matching one.

As yet. But we are seeing good success in the e-way bill and that has given a lot of confidence that more and more businesses are becoming formal. We are confident we are in the right direction. Going forward, there will be simplification of this process even further.

Will reverse charge, invoice matching all happen in due course?

We have a committee which is also examining the reverse charge mechanism.

You mentioned the formalisation of the economy. Something like GST forcibly formalises the economy. This does benefit the economy and the country in the long term, but isn’t it politically risky in the short term?

Previously, (with) all indirect taxes put together, we had 6.37 million assesses. Today we have 11 million. In the short run it may sound painful to some who have to now come into the formal network. I have had occasion to engage with businessmen across various industries — textiles, plastic goods, utensils, steel — and across the country. My own judgment is that young businessmen, the children of businessmen, are very happy and excited by this formalisation.

They want to do their business honestly, they want to party hard, and sleep peacefully. They don’t want to have two books of accounts and worry and stress all the time on how to hide certain transactions. The next generation is delighted to be part of this. It is taking a little time for the existing business persons to appreciate an understanding that this is good for them, but gradually that process is changing.

Recently, a survey showed that 77% of companies are saying that GST had a positive impact on the business. Revenue collections are confirming that formalising is helping the collections. The last figure available is of April, around Rs 94,000 crore, but over last five years, 7.1% of annual indirect taxes is collected in April. If you extrapolate to an annual figure we are far going to exceed our receipts target (in 2018-19). To my mind, as and when we get an opportunity, we will reduce rates further. If any right-sizing or simplification has to be done in the process, we will do that.

So directionally, would it be accurate to say your approach will be fewer slabs and lesser rates?

I’ve not yet applied my mind to the fewer slabs, but lesser rates on many items, I do feel there is potential.

But if you think simplification is required, does it make sense to have so many slabs?

You must appreciate that different products have a different end market. India is not a country where everybody has a high standard of living so that we can have a mid rate of tax for everything as suggested by leaders of the opposition. The same parties’ leaders speak in a different voice in the GST Council. It’s unfortunate that we are trying to politicise a success story here. Collectively, all parties have worked together for this success. A product which is going to be used by millionaires and billionaires should have a high rate of tax and a product which is going to be used by the poor should have a low rate of tax. I think this is the worst form of bourgeois capitalism when people suggest there should be one rate. We will continue to have different rates. We will continue to tax the rich. And we will ensure that the poor and middle class of this country gets relief...

The question wasn’t about one tax rate but maybe fewer than you have now. You now effectively have at least five. Three would make business easier, wouldn’t it?

It’s a tax which is barely a year old, subsuming 40 taxes and cesses. We have to continuously monitor what’s happening and the progress in collections. Based on that it will evolve based on how it can be best administered for the benefit of the people of India.

The GST Council is among the best examples of cooperative federalism...

Absolutely.

What has been your experience working with the states?

Excellent. The good part is that in the Council, all parties have worked as a team, risen above political considerations, or a myopic view. I must acknowledge the contribution of all state finance ministers and governments. It’s a collective effort.

The Centre has also given up its right to fix tax rates and cesses. We have also put into the pool — maybe far more than anybody else. But it’s been in the spirit of cooperation. It’s been in the spirit of equality. Everybody had an equal voice and say in the Council. And no big brotherly approach has been taken. Inside the GST Council, we are by and large keeping the larger interest of the nation in mind and ensuring commonality of objective. Outside, let the politics take care of itself.

Petrol, real estate, liquor, what’s the thinking on those?

I think with an open mind all these issues will be considered by the Council.

Are you thinking of bringing aviation turbine fuel and gas under GST first?

That’s for the Council to decide.

But these are things you are open to?

The good part of PM Modi and his thinking is that we have never closed the door to debate , discussion, ideation. We like to look at new and innovative ideas on a continuous basis. In the Council, we will be open to all suggestions.

Moving away from GST, I have to ask you about the rupee. And oil. Are you worried?

The US has sanctions on Iran. The US is putting pressure on countries that buy oil from Iran. OPEC (Organization of the Petroleum Exporting Countries) reduced production. And the global economy is recovering so demand is rising. It’s elementary (why crude prices are going up). As regards the rupee, in 2013 the rupee touched 68-69 (per dollar). Raghuram Rajan, the then governor of RBI (Reserve Bank of India), tempered the situation by introducing FCNR(B) accounts, through which banks were able to raise $32 billion. That brought the rupee down.

In the Modi government, we increased forex reserves from $303 billion to $425 billion but also paid back that $32 billion. That has been the strength in the Indian economy and the improvement in the macroeconomy that the world has recognised. Currently there is a situation where the US has increased rates, there is a money flow, or rather a fear that people have that money will flow back to the US. There’s an international geopolitical situation with a trade war erupting. Oil prices have risen in the past three months.

All of this has caused a temporary situation (in the forex market). I am sure RBI is on top of things. This phenomenon is something we are watching. But effectively in our regime there has been no depreciation. But this kind of volatility has to be watched and in an organised market we can only have an organised response. We cannot have a knee-jerk one.