Center-State Revenue Dynamics Clarified
Dispelling misconceptions, Finance Minister Nirmala Sitharaman affirmed that it’s a fallacy to believe that all Goods and Services Tax (GST) collections are absorbed solely by the Centre. She emphasized the substantial contribution of GST to state revenues, which amounted to Rs 46.56 lakh crore from FY19 to FY24.
Distribution of GST Revenue
- State’s Share: States receive 100% of the State Goods and Services Tax (SGST) collected within their borders. Additionally, approximately 50% of the Integrated Goods and Services Tax (IGST) on inter-state trade is allocated to states.
- Central Devolution: Notably, 42% of Central GST (CGST) is devolved to states based on recommendations from the Finance Commission, ensuring a fair distribution of revenue.
Impact on Tax Buoyancy and Revenue
Sitharaman underscored the positive impact of GST on tax buoyancy, citing a notable increase from 0.72 (pre-GST) to 1.22 (2018-23). Despite the conclusion of the five-year compensation period and challenges posed by COVID-19, GST collections have rebounded to pre-GST levels, demonstrating enhanced revenue generation.
Reduction in Effective GST Rates
- Weighted Average Rate: The effective weighted average GST rate has steadily decreased since its introduction, declining from 14.4% in 2017 to 11.6% in 2019, lower than the suggested Revenue Neutral Rate of 15.3%.
- Tax Cuts: GST has led to tax reductions on various essential items, such as hair oil, soaps, electrical appliances, and movie tickets, compared to pre-GST rates. Essential items and services like unbranded food items, healthcare, education, and public transport have been exempted from GST.
Cooperative Federalism and Simplification Initiatives
- GST Council: Sitharaman emphasized the cooperative federalism embedded within GST governance, ensuring equitable representation for states. Decisions within the GST Council are predominantly made through consensus, reflecting a collaborative approach.
- Simplification Measures: GST streamlined a complex tax structure into a simplified five-tier system, raised turnover thresholds for registration, and reduced compliance burdens through uniform processes and IT-driven systems.
Empowering Small Taxpayers and MSMEs
- QRMP Scheme: The Quarterly Returns with Monthly Payment (QRMP) scheme has significantly benefited over 44 lakh small taxpayers and Micro, Small, and Medium Enterprises (MSMEs), reducing compliance requirements.
- Enhanced Financing: Tools like e-invoicing, TReDS, and the Account Aggregator framework have bolstered MSME financing, contributing to their growth and development.
Impact on Trade and Logistics
- E-way Bill System: The implementation of the E-way bill system has streamlined inter-state movement, reducing logistics costs and eliminating corruption at tax checkpoints.
- Inter-state Trade Surge: Consequently, domestic goods’ inter-state trade has surged, reaching 35% of GDP in FY22, up from 23.5% in FY18.
Historical Context and Leadership
Highlighting the historical trajectory of GST, Sitharaman credited the careful consensus-building efforts under Prime Minister Narendra Modi’s leadership, culminating in the passage of GST Acts by Parliament in 2016. The idea of GST was first conceived during the NDA government led by former Prime Minister Atal Bihari Vajpayee, underscoring its bipartisan inception.
As India continues to navigate the complexities of its tax regime, Sitharaman’s clarification sheds light on the collaborative efforts driving GST’s success and its transformative impact on the economy.
