India’s GST is all tangled up: 

India’s GST is all tangled up: 

Context

• There is a need to focus on making paying taxes easier and reduce costs, which was the main objective behind the goods and services tax (GST).

Complexity of the situation

India’s new indirect tax system – GST, which for the first time tries to standardize most taxes across this vast country’s many states, is proving to be even more difficult and disruptive to implement than first feared. That speaks to the unnecessary complexity the governments introduced into what should have been the simplest of laws.

What was the GST supposed to do?

• Here’s what the goods and services tax, or GST, was supposed to be: a simple and low, India-wide tax rate that allowed businesses to claim credits for the taxes that they paid on their inputs.
• First, the GST would bump up government revenue significantly as new products, services and producers entered the tax net.
• Second, it would reduce costs and increase efficiency, vastly increasing the competitiveness of Indian firms and making everything they produced cheaper.
• Third, it would make paying taxes so much easier that smaller companies would themselves seek to join the tax net, thereby increasing the size of India’s “formal” economy and boosting small firms’ chances for growth.
• Fourth, it would knit India’s many states into a genuine single market.

Will GST permanently increase revenue?

• The claim for credits might just be a one-off, a consequence of the transition between one rate and another.
• But it might also be to some extent a problem inherent in the system, if people are claiming input credit for tax at a higher rate than they pay on the eventual product.
• The government can’t be at all confident that the GST will permanently increase its revenue.
• Impact of GST on efficiency
• A well-designed indirect tax system would reduce compliance costs for companies.
• The GST is so complicated that even medium-sized companies are struggling to keep up with the rules, diverting resources that could have been devoted to productive activity.
• As for smaller companies, those who can’t afford to hire a tax planner or get online daily may simply shut up shop.
• The government insists that its online payment system is easy to use.
• Few who have actually had to use it seem to agree, and it’s their opinion that matters, not that of New Delhi bureaucrats.

Conclusion

Government need to reverse course and focus on returning to first principles. It needs to slash the number and level of tax rates. It needs to ensure people don’t have to wait for refunds. It can only do that if it remembers the original motivation for the GST, that is to make paying taxes easier and reduce costs. In the multitude of last-minute, politically inspired changes to the GST, that basic economic logic has sadly been forgotten.