Context
The GST has been a remarkable achievement and a unique experiment in cooperative federalism. In this, both the Union and the state governments gave up their tax autonomy in favour of harmonising domestic trade taxes.
Multiple rates: A major shortcoming in the structure of GST
- One of the most important shortcomings in the structure of GST is multiple rates.
- The committee headed by the Chief Economic Adviser estimated the tax rate at 15-15.5 per cent.
- It further recommended that in keeping with growing international practice, India should strive towards a single rate in the medium-term to facilitate administrative simplicity and compliance, but in the immediate context, it should have a three-tier structure (excluding zero).
- The structure finally adopted was to have four rates of 5, 12, 18, and 28 per cent besides zero, though almost 75 per cent of the revenues accrue from the 12 and 18 per cent slabs.
- Why single rate structure? The reasons for adopting a single rate structure in most countries are to have a simple tax system, prevent misclassifications and litigations arising therefrom, and to avoid an inverted duty structure of taxes on inputs exceeding those on outputs requiring detailed scrutiny and refunds.
- Why multiple rates? The main reason for rate differentiation is equity.
- But it is argued that this is an inefficient way of targeting benefits for the poor.
- Although the exempted and low-rated items are consumed relatively more by the poor, in absolute terms, the consumption may be more by the rich.
Suggestions
- Focus on the expenditure side: The ideal way of targeting the benefits to the poor is on the expenditure side, through targeted cash transfers to vulnerable groups and providing quality education and healthcare.
- Of course, unprocessed food items have to be exempted for reasons of administrative difficulty, but the list should be kept small.
- Right time to rationalise the rates: Now, in fact, is the opportune time to rationalise the rate structure.
- The economy is in recovery mode and more importantly, GST revenues have shown reasonably high buoyancy with collections of over Rs 1 lakh crore in the last 10 months and touching a record of Rs 1.68 lakh crore in April 2022.
- Role of e-invoicing: The revenue increase has not come about only due to the economic recovery.
- The more important reason seems to be that at last, the GSTN has been able to stabilise the technology platform.
- Mandating the issue of e-invoicing for all businesses above Rs 100 crore has enabled better invoice matching and detection of fake invoices that were used to claim the input tax credit.
- This has helped to improve tax compliance and has also enabled better enforcement.
- With time, the GSTN should be able to enforce e-invoice requirements on all businesses above Rs 10 crore, which will cover more than 95 per cent of taxpayers.
- Dealing with the excessive rate differentiation: The GST council is concerned about the problems arising from excessive rate differentiation and has set up a seven-member ministerial panel .
- But it has been widely reported that the committee is thinking of increasing the lower tax rate from 5 per cent to 8 per cent and moving some essential items from the 5 per cent category to the 3 per cent slab.
- This will be retrograde because a rate category will be added. The need of the hour is to reduce the rate categories.
- Merge 12 and 18 per cent categories: It would be preferable to merge the 12 per cent and 18 per cent categories into a 15-16 per cent slab and move the items in the 5 per cent category to the 8 per cent slab and remove the 28 per cent category altogether.
Conclusion
The merger of 12 and 18 per cent categories will result in the GST structure with two rates and as the cesses will cease after 2026 when the compensation requirement is over, it will really become a “good and simple tax”.
