India’s GST system needs further reform

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Source: The post India’s GST system needs further reform has been created, based on the article “Towards a good and simple tax” published in “Business standard” on 11th July 2024

UPSC Syllabus Topic: GS Paper3- Indian Economy – Issues relating to mobilization of resources.

Context: The article discusses the need for further reforms in India’s GST system. It highlights increased revenue but points out that more changes are needed to reduce distortions, simplify rates, and expand the tax base to improve efficiency and compliance.

For detailed information on Understanding GST revenue performance read this article here

What is the current status of GST revenue?

  1. GST has replaced 14 indirect taxes, leading to a streamlined tax system.

2.In April 2024, GST collections reached a record high of ₹22.1 trillion, marking a 15.5% increase compared to the previous year.

  1. For the first quarter of the financial year, GST revenues were ₹85.57 trillion, slightly higher than the ₹85.05 trillion collected in the same period last year.
  2. This represents a 10.2% growth in GST collections, surpassing the estimated nominal GDP growth.
  3. Such growth in revenues is attributed to robust economic performance and enhanced compliance facilitated by improved tax administration and technology integration.

What changes are required for a better GST system?

  1. Expand the GST Base: Include sectors like petroleum products, electricity, and real estate in the GST. Currently, petroleum products are excluded due to their significant contribution to state revenues (over 40%), but their inclusion could reduce the cascading effect of taxes on other sectors.
  2. Rationalize Rates: Reduce the number of GST rates to simplify the system. For instance, merging the 12% and 18% rates into a 16% rate could be revenue neutral, while increasing the items taxed at 5% to 8% could enhance revenue without major disruptions.
  3. Limit Exemptions: Exemptions should be confined to unprocessed foods and perishables. Taxing other items, previously exempted, at a lower rate of 8% can broaden the tax base and increase revenue without impacting price stability significantly.
  4. Focus on Major Taxpayers: By keeping thresholds high, the system can concentrate on larger taxpayers. Data from Karnataka shows that although 93% of GST dealers were small businesses, they accounted for only a small portion of the turnover and tax paid. This approach ensures that compliance efforts are efficiently targeted.

Question for practice:

Examine the current status and required changes for a better GST system in India based on recent revenue performance and proposed reforms.

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