The government’s willingness to converge the goods and services tax (GST) rates and make compliance easy for smaller taxpayers is welcome. Fewer, convergent rates would reduce classification disputes, boost revenues and make production more efficient. And easing compliance will make transition to the new tax system less painful. India has a four-tier GST, with rates varying from 5 per cent to 28 per cent, without counting the cesses. Also, the same kind of product has different rates, and such divergence in rates will only add to classification disputes. There is scope to converge rates.
The current tax/GDP ratio — combined of the Centre and states — is about 17 per cent, of which about 5.7 per cent comes from direct taxes. Indirect taxes that have been subsumed in GST account for about 7 per cent, and the balance comes from petroleum, customs and stamp duties that are outside GST. So, the maximum revenue to be replaced is about 7 per cent of GST. This means a GST rate of about 14 per cent would enable the government recoup more than the current revenues. It is eminently feasible to have a single moderate rate for all goods and services. But the base must not be riddled with exemptions.
States must agree to include petroleum — which accounts for around 12 per cent of the tax revenues — in the GST tax base. It will help lower the rate of GST, which creates audit trails across the income and production chain, reduce evasion, make production more efficient and widen the tax base, including of direct taxes. A standard rate would keep the GST chain intact. It would enable refiners to claim credit on all taxes paid on inputs and make production efficient. Top-up cesses over and above the standard rate would still make sense.
States’ revenues will be protected, as they have been guaranteed full compensation for five years for any revenue loss in relation to a normative growth from the revenue earned in 2015-16. The Centre should have the confidence that a moderate rate of 14 per cent would boost collections. A simple and clean tax structure will raise compliance, result in efficiency gains and drive growth.