Towards a single low tax regime

News: The Goods and Service Tax (GST) regime which reduced big barriers to free trade and economic growth in India is back in the news due to various reasons, including demand for low-tax regime.

Why should India move towards a low tax regime?

The late Finance Minister of India, Arun Jaitley had announced that the 28% GST slab, which he called the “dying slab”, would be phased out, except for luxury items. In addition, he said, India would eventually have just two slabs: 5% and a standard rate between 12% and 18%.

There is empirical data from across the world which talks about the benefits of a unified single tax.

The ‘Sin’ taxes impede the growth rate and creation of jobs under ‘Make in India’ in India. The high taxes create an economic ripple effect downstream, which finally reaches down to the bottom of the employment pyramid.

• For example, a five-star hotel, paying sin tax, generates a lot of direct low-salaried employment such as waiters, housekeeping staff, etc., it also generates indirect employment, such as it buys furniture, carpets, air conditioners, cutlery, etc. So, it’s unwise to tax these hotels to death.

It is a complicated and confusing tax regime, due to its different slab nature.  For example, the GST on bread is zero, but the vegetable sandwich is in the 5% tax slab, hitting the vegetable grower directly.

The present regime leads to harassment and litigation. For example, ID Fresh Food appealed against a GST ruling of the Authority for Advance Rulings, which made a distinction between rotis and parotas, in which rotis were subjected to 5% slab and parotas were subjected 18% slab.

There are various items that are exempt from GST. For example, Petrol, diesel, and aviation turbine fuel come under Central excise and State taxes. These Central excise duties and varying State taxes on petrol and diesel, are probably the highest in the world

In addition to above, there is a distrust between the States and the Centre on revenue sharing. Various state governments are angry at the Centre for reducing the States’ autonomy and disregarding the federal structure of the Constitution.

Way Forward

The Finance Ministry must adopt the principles of Keep It Simple, Stupid (KISS) which is used in the low-cost airline model. It means keep a framework which is so simple that even a stupid person would be able to understand and comprehend it without problem.

The government can come up with a single low tax regime along with a list of exempt items. The tax regime can be of just two categories: (1) goods eligible for zero tax and (2) goods that will fall under a single rate, say 10% or 12%.

The GST framework should allow more people to buy items purchased by the rich and upper middle class.

The GST reform would ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collections and reduce corruption

Source: The post is based on an article “Towards a single low tax regime” published in the “The Hindu” on 23^rd June 2022.