Goods and Services Tax (GST)

Towards a single low tax regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Single slab structure in GST

Context

The introduction of a uniform GST was a watershed moment in India since the country’s earlier regime of taxes and cesses. However, GST is still a complicated tax regime with different slabs.

Unified single tax

  • Empirical data from across the world on the benefits of a unified single tax is incontrovertible
  • This needs bold and clear reformist thinking at the political level.
  • Imposing a high GST in some areas does not make sense.
  • ‘Sin’ taxes are at cross purposes with the government’s policy of generating growth and creating jobs under ‘Make in India’.
  • High taxes on air-conditioners, air conditioned restaurants, chocolates and luxury cars create an economic ripple effect downstream, in a complex web of businesses that have symbiotic relationships.
  • The effect finally reaches down to the bottom of the employment pyramid.
  • Distrust between State and centre: There is distrust between the States and the Centre on revenue sharing.
  • There is also anger at the Centre for riding roughshod over the States’ autonomy and disregarding the federal structure.

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,
  • To prevent misclassifications and litigations arising therefrom,
  • 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.

Way forward

  • Move people up the value chain: The plan must be to figure out how to rev up the economy by making the rich and upper middle class spend and move more people up the value chain instead of designing a tax system that keeps these products out of the new consumer class’s reach.
  • The same lack of logic applies to taxes on wine, rum and beer, which generate large-scale employment and are the backbone of grape and sugarcane farming and the cocoa industry.
  • In the automobile sector, the GST on electric cars, tractors, cycles, bikes, low-end and luxury cars ranges anywhere from 5% to 50%.
  • The sale of automobiles is the barometer of an economy.
  • Single tax slab: A directive to the bureaucracy is necessary to come up with just two categories: goods eligible for zero tax and goods that will fall under a single rate, say 10% or 12%.
  • Then there are items that are exempt from GST.
  • Bring fuels under GST:  Petrol, diesel, aviation turbine fuel are not under the purview of GST, but come under Central excise and State taxes.
  • A single low tax regime will ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collections and reduce corruption

Conclusion

The Finance Minister should take a cue from the Prime Minister, who hinted at major reforms in the aftermath of COVID-19, and do away with all the confusing tax slabs in one fell swoop.

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