The GST, as marketed by the Government, is a ‘good’ tax. However, it is not a ‘simple’ tax
As Union Finance Minister Arun Jaitley made his comments on improvements to the Goods and Services Tax (GST) regime, he let on to one of India’s badly kept secrets, large companies and taxpayers pay an overwhelming percentage of India’s tax bill. It was revealed that over 40 per cent of businesses have paid no taxes under GST, although many of them have claimed credit for prior excise payments. The Indian economy, which has survived on consumption over the past few years, depends on a small sliver of its population to keep the engine ticking. However, one of the ways to improve the economy and ensure a fairer distribution of wealth is to undertake major structural reform.
Even though the Government hyped up GST and introduced it in a midnight ceremony in Parliament, the fact is that it is the most fundamental structural reform that the Narendra Modi Government has undertaken. And like any structural reform to any large economy, it has had major teething troubles. Part of that is because of the constant flip-flops the GST Council has taken as well as the unnecessary number of GST slabs, extra cess and crucially documentation required by small companies and traders that seemed to hamper the system. At the same time, technical issues faced by the GST network meant even more delays and the sucking out of liquidity for exporters meant that trading seemed to have stopped. Taxes on various products have been raised and lowered before, but the speed with which the GST Council changed the structure on the automotive industry, without studying sales figures for a few months, was not their finest moment. At the same time, the ridiculously high top tier of GST of 28 per cent means that India’s reputation as a high tax country is not going away anytime soon.
One could safely presume that given a reasonable tax rate, both for direct taxes like income tax and indirect taxes like GST, compliance will rocket up. This is because most human beings are inherently honest. With a high tax rate and a small tax base, India has the lowest number of tax-payers as a percentage of its population among major economies. While further structural reforms are urgently needed in India for economic growth, the Government needs to enhance consumption. Increased consumption is what will drive the Indian economy to higher rates of growth in the short-term. So, while GST is a structural reform, tweaking GST is a tactical reform but more tactical changes need to be undertaken.