Photo: PTI
Photo: PTI

A need for tax reform

India should ideally have most economic activity taxed at a single rate

The World Bank has quite rightly criticized the complicated goods and services tax (GST) introduced in India.

There are four rates—plus many items are exempt from the tax; there is a special rate for gold; key products such as petroleum, electricity and real estate are not under the GST regime; and there is also a cess. The top GST slab in India is the second highest in the world.

High GST rates are a problem because such indirect taxes are regressive. The complicated rate structure limits efficiency gains. It is good that the GST Council has been trying in its recent meetings to address these problems.

This newspaper has often argued that India should ideally have most economic activity taxed at a single rate, with a small list of essentials that attract no tax as well as a small list of demerit goods that should be taxed at a high rate. Additionally, the best way to bring down GST rates is by raising more direct taxes.

In other words, direct tax reforms are the key to lower indirect tax rates.

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