It will take at least two more years before the country has a stable Goods & Services Tax (GST) regime.

This indirect tax regime – which made its debut in 2017 and was touted as “One Nation One Tax” – which enters its fourth year is yet to become a single tax regime. Critics say, this is not easy to achieve in a federal structure, where States have their say.

In fact, the man who brought GST regime, former Finance Minister Arun Jaitley, on its second anniversary had written in a blog post “A single rate under the Goods and Services Tax (GST) is not possible in a country with poor people… It would be inequitable to apply a single rate in countries where there are a large number of people below the poverty line.”

But, expectations are that the fourth year of GST may see a decision on whether the Centre will resort to borrowing to pay compensation to States. The GST Council is scheduled to meet this month for 41st time with just this item on agenda. The Centre is bound by a law to compensate fully for the shortfall in State GST revenue. However, it remains to be seen who will take the guarantee and, on whose account, it will be charged.

Ashwani Mahajan the National Co-Convener of Swadeshi Jagaran Manch, said, “GST implementation in a federal system has its own set of problems and challenges. A key challenge has been division of revenue between the Centre and States. Then there is also a challenge of diversity in terms of economy — there are huge inequalities, due to which we need multiple rates to give relief to poor by taxing commodities at lower rate of GST which are necessities for equity considerations, but it causes issues on efficiency.

“Paying compensation to the States has not been easy. And more than these the technical glitches have created more problems. Therefore, the settling down process will still take a while.”

Praveen Khandelwal, Secretary General Confederation of All India Traders, said, “We are of the view that the country requires two more years to make GST a stable taxation system provided the GST Council takes stakeholders into confidence and draw ways and means to simplify the system, remove technical glitches, avoid penal actions except on wilful avoidance of tax and make attempts to encourage more and more people to embrace GST taxation system. The fear of GST cobweb is needed to be removed.”

A man who has been in thick of things is Kerala Finance Minister Thomas Isaac, and he has often given vent to his feelings over the “faulty implementation” of GST. Asked about how he sees the last three years, he said, the potential of GST could not be harnessed because of the implementation problems.

“Even on the third anniversary, the annual returns are not on time. The IT backbone is far from complete. The ad hoc revisions in the rate have rendered the tax non-revenue neutral. And, now, with the Covid-19 pandemic, the revenues of all States have shrunk. And the Central government has largely failed to keep the promise — the solemn promise made to the states again and again, and enshrined in the law, that they would be compensated if there is increase in the revenue is less than 14 per cent when compared to the previous year,” Isaac said.

It would have made economic sense in a recession if the GST compensation was made available in time if only as a contra-cyclical measure to support the states. The fact that it was not done is a major breach of faith.

“From my experience of the last three years, I feel that the rate split, which is currently 50:50, must be changed to 60 for the States and 40 for the Centre for the simple reason that the total subsumed tax is 55 for States and 45 for the Centre. So I think this crisis is an opportunity to revisit the split accordingly.”

Isaac recalled that Kerala was given the flexibility to impose a cess on SGST last year. This cess, however, has no implications for inter-State trade. “So we must think of bringing about a federal flexibility so that States can have the flexibility to tweak their SGST within a narrow band between one and two per cent. After all, the essential takeaway during the last three years is that we have lost any right to tax.”

He is not the only one talking about technical issues.

“The first and most important issue to be addressed is the technical glitches which the trade faces on a regular basis. We have suggested that the technical audit should be done on a monthly basis so that it works at power with the law framed. At present because of technical issues law is being changed,” said Khandelwal.

(inputs from Shishir Sinha and Vison Kurien)