GST Compensation | Hasmukh Adhia: GST compensation to states should not be extended: Hasmukh Adhia

Hasmukh Adhia, former Union finance secretary, argues that extending compensation to states will mean increased laxity in state tax bureaucracies. Here are edited excerpts of an interview to Shantanu Nandan Sharma:

Do you believe that the Goods and Services Tax (GST) was hurriedly implemented?
For a big reform like the GST there can’t be a most appropriate time. One has to go ahead. The government of the day had the political will to bring in the reform without any further delays. So it happened. We effectively communicated about it with all stakeholders. In the run-up to its implementation on July 1, 2017, I myself travelled to many commercial hubs (non-metros) such as Vadodara, Bhopal, Guwahati, Bhubaneswar, Mysore, Indore etc. to clear doubts in the minds of business community and chartered accountants.

How do you describe GST’s evolution during the last five years? Many stakeholders allege that it is still very complicated…
To a large extent, the government has been able to simplify the processes. But there has to be a counter-balance to its possible misuse. Initially, we made the registration process very easy. It took just three days once it was applied online. As there were no physical checks, some unscrupulous elements took advantage of the system and manipulated it by creating bogus entities. So the government had to tighten the process to plug revenue leakages and misappropriation of input tax credits.

A large number of states are now demanding an extension of the compensation clause beyond June 2022. Do you subscribe to that view?
The compensation provision (for loss of revenue arising out of its implementation) was embedded because the GST was to bring about structural changes. It was a shift from production-based taxation to consumption-based taxation. So there was an apprehension that the revenue of the states with more manufacturing hubs might actually come down. So the compensation was more an insurance against tax losses for five years (2017-22). But if it is continued for too long, it will lead to laxity in states’ bureaucracy. It will act as a disincentive in mopping up more taxes. The GST compensation to states should end now.

What’s your projection for monthly GST collection in six months to one year?
After a year or so, the monthly GST collection should be around Rs 2 lakh crore. Such a mop-up is possible because it is increasingly becoming difcult for any entity to manipulate the system.

Going forward, shouldn’t India have just two GST rates?

Yes, there needs to be a rationalisation of tax rates. The number of rates should be slashed to three and eventually to two. But what those rates should be is a matter of calculation only. The revenue-neutral figures have to be factored in.

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