This conference season, there’s an air of quiet optimism on the growth front. India seems set to pick up economic speed. A credible policy reform and stepped-up investments are expected, whichshould boost the growth momentum. Yet, even as we look ahead, we must also take note of the remarkable cooperative federalism that was on display in the last several months. The goods and services tax (GST) has, indeed, been innovatively path-breaking in many ways.
The GST Council, a body of state finance ministers and headed by the Union finance minister, has provided an institutional mechanism for reaching consensus on tax design in the realm of consumption taxes nationally. The GST is a destination-based single tax on the supply of goods and services, from the manufacturer and/or service provider to the consumer. It is one indirect tax for the entire nation.
International experience suggests that changing over to a forward-looking transactions tax regime like GST leads to a host of implementation issues, which, in turn, calls for follow-through policy action. This has been the case in India as well. There’s been welcome corrective steps taken in the GST framework, and several tax rates and top slabs for various goods and services have been rationalised.
Further revamp and rationalisation is required, particularly of middling rates in the GST regime, and for the prompt inclusion of two or three broad heads in the new system. The GST Council needs to build consensus to include power, the main petro products and real estate in the GST framework. To bring land and buildings under GST would likely require an amendment to the GST Act, as real estate has not been defined as either a good or a service.
GST has replaced multiple indirect central and state taxes. As many as 17 taxes have been done away with. This means significant reduction in transaction costs. Credits of input taxes paid at each stage of output would be available at subsequent stages of value addition and production. It makes GST essentially a tax on value addition, and puts paid to cascading tax-on-tax across the production value chain.
Back in the unreformed 1980s, it was par for the course to levy tax-on-tax cascades even on lumpy capital goods. It was only in the mid-1980s that we began a system of value added taxes on select goods at the Centre. Service tax was introduced in the 1990s, and we opted for value-added retail taxes subsequently, but with only limited scope for set-off of input tax credits.
GST now does it right along the value chain, across goods and services, and both at the central and state levels. The idea is to shore up transparency in tax administration, widen the tax base purposefully and bring about buoyancy in revenue collection.
But some GST implementation issues remain, such as matching sales and purchase invoices so as to preclude over-claiming of input tax credits. IT must be leveraged for an innovatively efficient indirect tax regime. In smaller and high-income economies, a single rate GST is possible. But India needs multiple GST rates, as is the case in larger economies in, say, Europe. This is to abide by the ability to pay principle in indirect taxes, with higher tax, for instance, on items of luxury consumption, and lower tax rates on others.
But it is difficult to get GST rates, slabs and exemptions right in the first instance, despite a proactive GST Council. The peak GST rate of 28% has now been confined to only about 50 items, and as many as 175 items have reportedly been moved to lower tax slabs. We do need to rationalise tax rates to step up tax buoyancy.
In the future, the council must rationalise the rates of 12% and 18%, for a combined rate of, say, 16%. It needs to fix astandard GST rate levied on most items. Further, the peak rate itself needs to be reduced in the mid-term to, say, 24%, as the peak direct corporate tax rate is slated to be 25%.
The 12% rate vis-à-vis the low 5% rate for several items of everyday consumption also needs to be rationalised. The objective is to have a 0% GST rate for exempted items, a low rate, a standard rate and a high rate for select items. GST on gold perhaps needs to be 2% instead of 3%. Next, power needs to be included in GST and the opaque electricity duty levied by the states, which garners over Rs 30,000 crore a year, must be done away with.
Given that the main petroleum products have environmental externalities, the council needs to include them in GST, while providing for limited credit of input taxes. It would duly boost efficiency in transportation, logistics and distribution.