Equitable Distribution: PAC Report On GST

Syllabus: GS3/Indian Economy

Context

• The 19th report of Parliament’s Public Accounts Committee (PAC) called for a comprehensive overhaul of the GST framework, proposing a revamped ‘GST 2.0’ to address procedural inefficiencies and compliance challenges.

About the Goods and Services Tax (GST)

• It is a comprehensive, multi-stage, destination-based tax levied on the supply of goods and services in India. 
• It was implemented on July 1, 2017 by the 101st Constitutional Amendment Act, 2016, replacing multiple indirect taxes such as VAT, service tax, excise duty, and others.
• It is governed by the GST Council, which includes representatives from both the central and state governments.
• For the key features of GST, kindly visit the:  https://www.nextias.com/ca/current-affairs/23-09-2024/7-years-of-goods-and-services-tax

Need For Reforms: Concerns Highlighted in the PAC Report

• Decline in Indirect Tax Revenue: Nearly 2% drop in indirect tax revenue between FY18 and FY20, prior to the COVID-19 pandemic.
  • High-revenue states like Maharashtra, Tamil Nadu, and Karnataka contribute significantly but feel that revenue redistribution is not proportional to their contribution.
  • States with low tax collection capacity, such as those in the Northeast and economically weaker regions, struggle to generate sufficient revenue under GST.
• Impact on Fiscal Federalism: The Central Government controls GST rates, exemptions, and procedural rules, limiting states’ autonomy in taxation.
• States’ Compensation Fund: Non-auditing and non-finalization of the States’ Compensation Fund for over six years.
  • It strained the functioning of the federal tax structure and delayed compensation to states for revenue losses.
• Centralizing Tendencies: Major revenue-generating states have expressed concerns over diminished fiscal autonomy and sharp declines in indirect tax collections.
  • The destination-based nature of GST adversely affects manufacturing-heavy states.
• Complex Registration Processes: Issues with biometric-based Aadhaar authentication and other registration hurdles were identified as barriers to achieving the vision of ‘One Nation, One Tax’.
• Revenue Leakages: Report highlights concerns over tax evasion and fraudulent input tax credit claims, which affect revenue distribution fairness.
• Criminal Penalties for Unintentional Errors: The PAC flagged the issue of honest taxpayers facing severe penalties for unintentional compliance failures, calling for a more balanced approach to enforcement.

Recommendations for Reform

• GST 2.0: The report calls for a comprehensive review to develop a ‘GST 2.0’ which would address states’ demands for a greater share of GST revenues, closer to 70%-80%, up from the current 50%.
  • With GST 2.0, authorities may:
    • Implement biometric authentication to prevent fake invoicing.
    • Use real-time transaction monitoring to detect anomalies.
    • Strengthen penalties and legal actions against tax evaders.
• Timely Audits and Updates: The PAC recommended establishing a formal mechanism with the Comptroller and Auditor General (CAG) to ensure timely audits and updates on pending cases.
• Simplification of Processes: Streamlining GST procedures and enhancing the user-friendliness of the GST portal are essential to reduce compliance burdens and improve efficiency.
  • It aims to reduce the compliance burden on MSMEs.
• Reintroducing GST Compensation: Extending compensation support for another 3-5 years, especially for economically weaker states.
• Improved GST Portal: The PAC recommends clear guidance and support for taxpayers at every step of the filing process to minimize errors and delays.
• Enhancing Tax Compliance: Implementing stricter measures to curb fraud and ensure that tax revenues are fairly distributed.
• GST Revenue Devolution Formula: Developing a new mechanism for progressive distribution of GST revenue, ensuring fairness based on economic capacity and needs.
• Periodic Review of GST Rates: Establishing a structured review process to align GST rates with economic conditions and ensure consistency.
• Use of Technology: The e-invoicing system and AI-based monitoring tools have been suggested as ways to reduce leakages.

Conclusion

• The PAC’s findings underscore the need for equitable distribution and systemic reforms in the GST framework. 
• By addressing the challenges, India can ensure a more balanced and effective tax system that supports both economic growth and fiscal federalism. 
• Collaborative efforts between the Centre and states will be crucial in achieving these goals.

Source: TH