GST: A turning point?

How to improve Tax to GDP ratio with GST? 

Context: 

For the last 25 years, our tax-to-GDP ratio has been stuck at between 16 and 17 per cent. This is severely constraining our fiscal capacity to devote more resources to our underinvested sectors such as education and health.  

How to improve tax to GDP ratio with GST? 

• The goods and services tax (GST) reforms offer the prospect of raising the tax-to-GDP ratio by at least 2 percentage points if we improve the information technology platform and address the issues of raising the incidence of duties. 

What are the reasons for Higher GST Revenues? 

The recent upsurge in GST revenue is due to the following, 

• Better compliance prodded by the matching of invoices  
• Better monitoring of permissions granted for registrations through physical verification of the premises  
• Evaluation of the past income tax payment record. 
• All this has reduced the volume of fake input invoices. 
• Better coordination between the two tax departments — Central Board of Direct Taxes and Central Board of Indirect Taxes and Customs – has helped boost collections. This has led to smaller units covering the unincorporated and the family units to pay greater amount of taxes. 

What are the changes required in the GST to improve tax to GDP ratio? 

The Fifteenth Finance Commission in its report based on an IMF study has said that the GST incidence of duty has fallen from 14 per cent to 11.8 per cent. This needs to be corrected. There are a number of steps that need to be taken. 

1. Large number of exemptions need to be phased away: The government need to restrict GST exemptions only to those items that were VAT (Value Added Tax) exempt in the pre-GST period. 
2. There is also a need to revisit the GST rates on tobacco and gold:  
   • India need to raise the GST rates on tobacco, which is levied on reverse charge basis, from the present level of 5 per cent. 
   • Similarly, on gold, there is a need to revise the GST rate of 3 per cent on equity consideration. As more than 80 per cent of gold and gold ornaments purchased and owned is by the top decile of the population. 
3. There is also the need to deal with the problem of inverted duty structure in sectors such as textiles and footwear. 
4. Finally, the real estate sector also needs to be brought under the ambit of GST. This will clean up the land market and increase the revenues more on the direct tax side as the GST rate would be more in the nature of clearing rate to offset the embedded input taxes. 

Conclusion: 

The recent upsurge in GST revenue, nudged up by better compliance, can be sustained by rate changes to increase the incidence of GST duty. Meanwhile, the buoyancy in the GST revenues can sustain higher healthcare expenditures in the short run, which is welcome indeed. 

Terms to know: 

• Tax to GDP ratio 
• Tax buoyancy 
• inverted duty structure 
• Goods and Services Tax 

Source: Business Standard