The promise of our goods and services tax is unfulfilled

Source: The post is based on the article “The promise of our goods and services tax is unfulfilled” published in “Live Mint” on 24th August 2023.

Syllabus: GS3- Indian economy

News: The author discusses the shortcomings of India’s Goods and Services Tax (GST) system, highlighting that it hasn’t met its promised benefits in revenue growth and GDP increase. This is mainly due to multiple tax rates, exemptions, and the concept of a revenue neutral rate.

What were the expected benefits from India’s Goods and Services Tax (GST) system?

Tax Collection Buoyancy: Due to inbuilt incentives of compliance, there was expected to be less scope of leakage.

Only Tax on Value-Added: The tax burden would only apply to the added value in the economic chain, preventing ‘tax on tax’.

Greater Compliance: Suppliers prefer dealing with parties who have proof of tax payment, ensuring a chain of compliance.

Inter-State Commerce Boost: GST removed inter-state barriers to commerce.

GDP Growth: A 2009 study by NCAER estimated that the GDP growth rate would rise by 2-2.5% annually because of GST.

Boost in Exports: The tax reform was expected to increase Indian exports by 10-14% year after year.

What are the major reasons for not fulfilling the expected benefits from the GST system?

Lack of Tax Buoyancy: Indirect taxes didn’t increase as expected. The Economic Survey of 2023 confirmed this.

GST Revenue vs. GDP Growth: GST revenues didn’t outpace nominal GDP growth. The actual tax rate was only 11.4% compared to the expected 17%.( according to Prime Minister’s Economic Advisory Council)

Rate Slabs Proliferation: Multiple rate slabs, with items at 28% or higher, and others at 0% or 3%, caused complexity and imbalance.

Revenue Neutral Rate (RNR) Concept: Focusing on RNR led to misjudgment in predicting tax compliance behavior between pre and post-GST regimes.

Exemptions and Classifications: Many exemptions and arbitrary classifications resulted in disputes, litigation, and pending refunds.

Exclusions from GST: Large parts of the economy were left out of GST, which prevented lowering the overall tax rate.

Impact on Small Businesses: High rates and compliance costs hurt small businesses, even with a composite rate of 6%.

What should be done?

Reduce High Rates: To promote compliance and fairness, tax rates, especially those that are exceptionally high, need to be reduced. This includes rates on imports.

Simplify Compliance: Introduce a user-friendly app, similar to the Bhim app for UPI transactions. This will ease the GST entry process for small businesses and encourage better compliance.

Incorporate More Sectors: Many economic sectors remain outside GST. Bringing them under GST can help distribute the tax burden more evenly.

Revise Rate Slabs: The current variety of tax slabs complicates the system. A more uniform approach is required.

Minimize Exemptions: Overly specific exemptions and classifications lead to litigation. Reducing these can streamline the system.

Focus on Small Businesses: Adjustments should cater to small entrepreneurs, ensuring GST doesn’t disproportionately impact their profits.