Five years ago, a new indirect tax system was launched by the Narendra Modi government. The Goods and Services Tax was introduced to replace the complex order of entry levies and sales tax in India. It also aimed to modify tax compliance and administration within the country. Half a decade later this move has become a lot more than just being about “one nation, one tax”.

On a positive note, GST has been successful in facilitating the free movement of goods in the country. Earlier, checkposts served as bottlenecks that not only involved a lot of waiting time but were also breeding spots for corruption — as taxes varied from state to state, city to city and even local bodies. Thanks to GST, the only requirement at these checkpoints is now the e-way bill.

The most welcome change that came along with GST is the e-invoice system. It has now become an integral part of doing business in India. The segmented approach to this provision aided its acceptance. Starting with companies with a turnover of more than Rs 5 billion in October 2020, to business entities with an annual turnover above Rs 100 million in October 2022, the law has slowly expanded its coverage coverage. The GST number that can track every supply chain transaction has helped to address fraudulent claims and fake invoicing.

However, GST is not just about tax collection anymore. It is important to note that the quantifiable parameters of GST success do not incorporate social and political costs, which have financial and administrative snowballing effects.

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Further, GST has raised issues between states and the Centre. It harms producer states and rewards consumer states in terms of revenues. States like Tamil Nadu, which have invested highly in their manufacturing ecosystem, are facing new problems. With GST, their major source of income from the view point of production is at stake. Though the government decided to roll out compensations for five years of revenue losses for such states, the pandemic affected this plan — the guarantee of 14 per cent growth for the first five years in GST revenues choked under depleted funds. Many states are thus coming together to demand an extension in these compensations because of their deteriorating finances.

A large burden of the slowdown has been passed on to the states as the Centre has been steadily increasing cesses and surcharges to earn revenue. The amplification of the Centre-state disparity after GST was implemented has put Indian federalism in a tight spot. As state revenues are suffering, there is an urgent need for the inclusion of gasoline, diesel, jet fuel, real estate and electricity — this might be a good bargain to arrive at.

Second, federalism is also suffering because of GST from a broader perspective. State governments have lost most of their independent taxation powers, which has increased their dependence on the Centre. GST is monitored by a council where the states have only 2/3 of the voting rights. The Centre, which is vested with the remaining third has presented this reform as a sign of its commitment to federalism, but many states have expressed reservations because any decision can only be made in the GST council if it gets 75 per cent of the votes — a proportion that gives a veto power to the Centre which on the contrary can prevail if it gets the support of only 19 states. Here, it must be noted that these may be the smaller states as each state has the same voting right in the council irrespective of its population. It must also be noted that the decisions of the council are binding on Parliament — in contravention to the principle of parliamentary sovereignty.

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Third, there are issues related to real estate and intermediaries. Two significant structural issues in this sector are with transfer of developmental rights (TDR) and floor space index (FSI). TDR is a service liable for GST. Land being an immovable property, GST is not applicable on it and the benefits arising out of it. This makes TDR beyond the purview of GST. But as this is not the case, buyers are paying an additional amount levied due to GST. Regarding FSI – which is the maximum permissible floor area that a builder can build on a particular piece of land — often, developers are granted a right of additional FSI from local municipal authorities and GST is levied upon such grants.

Fourth, the delay in establishment of an appellate tribunal related to GST is increasing the burden on the judiciary. Trapped GST refunds and numerous court cases are alarming.

Lastly, sectoral issues with GST continue to persist. Fuel is out of its purview and the airline industry doesn’t get credit for taxes on jet fuel. With a 28 per cent GST rate on products like plywood, automobile parts, and electronic items, potential buyers are forced to opt for unregistered dealers. In fact, for local and unskilled labour, it is difficult to derive an MRP for the products that they hand craft. India’s online gaming sector is one of the fastest-growing sectors in the media and entertainment space. With no differentiation between a game of skill and game of chance, there is a 28 per cent GST on the contest entry itself. The gaming industry attracts nearly $3-5 billion. Thus, an increase in this tax burden leads to a loss of investments.

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Five years ago, the question was, “is the country completely ready for a single tax?” Five years later, while this question remains relevant, there is a need to ask another: We have transitioned to a “One nation, one tax”, but at what cost?