Optimising GST to Make It Deliver – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/optimising-gst-to-make-it-deliver/articleshow/90361307.cms

Synopsis

The move towards a revenue-neutral rate is overdue and the collection forgone because of external events exerting a pressure on prices will make the case for compensating states that much stronger. That imposes its own set of complexities, because the compensation cess will, after June, go to paying loans taken by the Centre to make up for the shortfall in collection during the last two Covid-19 pandemic years. Compensation beyond the term set out in the original bargain with states will distort the tax structure further.

A group of state finance ministers set up to debug India‘s still-subpar goods and services tax (GST) is expected to collapse the rate structure from four to three. But it is wary of raising the lowest slab on account of the inflationary impact. The move towards a revenue-neutral rate is overdue and the collection forgone because of external events exerting a pressure on prices will make the case for compensating states that much stronger. That imposes its own set of complexities, because the compensation cess will, after June, go to paying loans taken by the Centre to make up for the shortfall in collection during the last two Covid-19 pandemic years. Compensation beyond the term set out in the original bargain with states will distort the tax structure further.

The GST Council has had some success in improving compliance, which is showing up in collections in recent months. But this is close neither to the assumed revenue-indifferent point nor to the projected buoyancy. Operational improvements can work only up to a limit. However, to reach a position where, say, every percentage point in economic growth delivers a fixed percentage point in indirect tax collection, the compromises made at the outset will have to be set right. These were in the nature of multiplicity of rates, limited coverage and erosion of the self-policing nature of the tax.

India simply cannot afford to kick the GST can further down the road. The pandemic has weakened the fiscal position of both the Centre and the states. India’s economic recovery during a period of elevated energy prices is predicated on building physical infrastructure through a surge in government borrowing. Improved tax buoyancy in the reconstruction stage would be better than attempting to fix indebtedness afterwards. GST offers a clear way out of the distortions and inefficiencies that have historically dogged India’s tax system. The country has a rules-based mechanism that is known to deliver. By the end of its first decade, India must make its version of GST deliver.

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