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Budget 2021: Cooperative Federalism - the route to increase GST collections

The inclusion of a statement on policy announcements on GST in the budget, of an intent to resolve these tax issues, will not only have a positive impact on the broader economy but also reaffirm confidence in the cooperative federalism model for tax policy

Bela Sheth Mao | January 31, 2021 | Updated 16:18 IST
Budget 2021: Cooperative Federalism - the route to increase GST collections
Growth in GST collections is likely to continue as economic activity picks up going forward

One of the biggest triumphs associated with GST is cooperative federalism, which has demonstrated successful collective decision making through the GST Council. It is therefore imperative that the same cooperative federalism model of the council be leveraged to finally put in the last piece of the GST revenue jigsaw - inclusion of petroleum products into GST and to engage a workable resolution on resolving the taxability of the online gaming industry. This will boost GST collections and further smoothen Centre-state relations.

Though the GST law now covers almost all aspects of goods and services, there are still areas where states continue to have separate jurisdiction or divergent views. One key area is the taxation of petrol products, which are now outside the ambit of the GST law.

The other is taxability of the online gaming industry, or more specifically, on determining whether it is a game of skill or a game of chance. The GST Council has, over the past three years, deliberated on both these areas but has been unable to reach an acceptable resolution.

Budget 2021

The petroleum sector is a key input for all industries. With fuel prices hitting record highs recently due to increased taxation, there is an urgent need for the administration to find a solution that will keep revenues intact and address the price rise.

The inclusion of petroleum products can lead to efficiencies in this sector. An area of focus for the Atmanirbhar Bharat initiative is on building India's energy security and reducing our dependency on oil imports.

A globally competitive GST regime for petroleum products can attract desired investments into this sector and reduce oil imports. Along with the rationalisation of fuel prices, this will benefit the entire country, including all states.

Until March 2020, GST collections had been showing an upward trend year-on-year. This trend is once again visible from December 2020. Hence, except for the period of lockdown, GST collections have been growing.

Also Read: Budget 2021: Date, time, sector-wise expectations; everything you need to no

The chart below shows trends in monthly gross GST revenues for FY 2018-19 and FY 2019-20.

The chart below shows trends in monthly gross GST revenues till the month of December during the current year i.e. FY 2020-21 as compared with FY 2019-20.

Growth in GST collections is likely to continue as economic activity picks up going forward. Though the short-term focus is to recover from the shortfall due to the pandemic, the administration should now initiate dialogue and discuss options for the inclusion of petroleum products within GST.

The over Rs 6,500-crore online gaming industry has bucked the popular trend and sustained its rapid growth even in the pandemic. India's fantasy sports sector has grown nine times in three years, with one marquee firm even winning an IPL sponsorship and featuring as the subject of a Niti Aayog white paper to discuss uniform regulations for the gaming sector.

Employment generation is a focus area for the government and online gaming industry has and will continue to generate thousands of jobs. News reports state that the Union Education Ministry is working to support students in online gaming and toy making to generate employment opportunities. Being a sunrise sector for India, online gaming requires support to continue its growth trajectory.

Also Read: GST collection to be record Rs 1.20 lakh crore in January: SBI report

Niti Aayog recently released a white paper for discussion on uniform regulations for the gaming industry, minus the tax aspects. States currently have divergent views on the industry, with some even banning online gaming.

So, along with uniform regulations, the industry needs a uniform tax position under GST. However, lack of clarity on what constitutes a game of skill versus a game of chance has created uncertainty about the taxability of the winnings. The debate on taxability revolves around whether such gaming can come under the scope of gambling.

There is jurisprudence, including under GST law, on what constitutes a game of skill versus a game of chance and the resultant taxability of online gaming, and the matter is currently pending in the Supreme Court. It could take a long time to find a resolution to this matter, through the litigation route.

The GST Council with its platform of cooperative federalism should be utilised to bring clarity on the taxability of the online gaming industry and support its growth for employment generation.

The Union Budget no longer contains policy announcements on GST, which is now the prerogative of the GST Council.

However, the inclusion of a statement in the budget, of an intent to resolve these tax issues, will not only bring cheer to these industries and have a positive impact on the broader economy, but also reaffirm confidence in the cooperative federalism model for tax policy.

(The author is Partner, Deloitte India.)

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