By Thomas Lutken —
Status: Not Started — While nearly 1,300 goods and 500 services are covered by the goods and services tax (GST), electricity, oil and gas, real estate, and alcohol are not currently in the ambit of the tax.
High Difficulty: Regulation, With Opposition — Changes to the GST must be approved by the GST council, which includes both central and state finance ministers. With states receiving less than expected payments from the center, India’s states oppose putting these items under GST for fear of losing revenue.
This is the twentieth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.
India should include electricity, oil and gas, real estate, and alcohol under its national goods and services tax, or GST. This will spur economic growth by reducing prices through input tax credits, ensuring a level playing field in the market, and improving India’s ease of doing business.
India saw a major shift in its tax policy in 2017 with the adoption of the GST. By centralizing the tax process, India streamlined many state and central taxes into a single system. However, oil and gas, electricity, alcohol, and real estate were all excluded; putting them under GST’s ambit will lower their prices and remove the market distortions caused by those differences in price.
The main benefit to consumers and the Indian economy will come from removing cascading taxes. Cascading taxes occur when a tax paid on an input, like natural gas, is added to the taxable value of the output, like fertilizer. Under GST, tax on natural gas can be deducted from the taxable value of fertilizers; this is called an input tax credit, or ITC. Currently, the final price of fertilizer includes several instances of “tax on taxes” driving up the price paid by final consumers. Once they are added to the GST, producers who utilize electricity or gas can use ITCs and pass on the benefit to customers through lower prices on the final product.
According to a 2018 Price Waterhouse Cooper (PWC) report, construction and development will also benefit. Today, a developer can claim up to one-third the value of the total sale as a “land abatement”– a sort of one-size-fits-all input credit. The PWC report notes that land can make up 50 percent of the price of real estate development, especially in India’s rapidly growing urban areas. Including real estate in the GST will simplify and encourage urban development, boosting one of India’s key sectors.
The difficulty in putting these products under GST is that states rely so heavily on them for their own revenue. Tamil Nadu’s value added tax (VAT) on alcohol topped $2 billion in 2017, over 10 percent of total tax receipts, and Gujarat estimates roughly 6.7 percent of its tax revenue to come from electricity duties alone. While the central government allocates a portion of the central GST to each state, collections have fallen short in the past year, adding to the apprehension of states to give up their few remaining sources of direct income.
While states might see lower tax receipts, lower prices and simplified tariffs would lead to overall benefits for India. India’s beleaguered electricity distribution companies owe over $10 billion in dues to generators, and increased industrial demand from lower prices can bolster their receipts. This will also help address cross-subsidy problems (where industry pays higher prices while agricultural prices remain artificially low), by lowering costs for the highest-paying sector — industries.
In a recent report, the International Energy Agency cited the exclusion of natural gas from the GST as a barrier to increased adoption. India has an ambitious target of more than doubling its share of natural gas use by 2030. However, because coal falls under GST while natural gas does not, the government is creating a market distortion against the cleaner fossil fuel. Removing such market inconsistencies, and ensuring a level playing field, is a key benefit of adding these products to the GST.
Finally, the greatest benefit of expanding the GST might simply be simplicity. The World Bank’s business profile for India cites simplified GST as boosting India’s ease of doing business. Firms will feel more confident investing in a growing market like India if the tax system is easy to understand and consistently applied across sectors.
The government of India could give a much-needed economic boost to the country by expanding the GST to include alcohol, real estate, oil and gas, and electricity. While the states may object due to lost revenue, the Indian economy and the Indian people will benefit from lower prices and the emergence of a fair market nationwide.