We need a simplified direct taxes code that will remove exemptions: Bibek Debroy

When GST was originally formulated, the revenue-neutral rate was expected to be around 18%, today the average GST rate is about 11.5%, so that clearly is not tenable, Debroy said.

Bibek Debroy, chairman of the Economic Advisory Council (EAC) to the Prime Minister, has stressed the need for tax reforms, including introducing the direct taxes code and removing tax exemptions.

During a virtual keynote address at Mint’s ‘Budget Conversations’, Debroy pitched for addressing the revenue shortfall because of the steep reduction of tax rates after implementing the goods and services tax (GST) regime.

“We need to talk about reform of taxation, a simplified direct taxes code, removing exemptions and also the goods and services tax. It is not only about integrating more products and services under the GST framework. It’s also about the GST rate. When GST was originally formulated, the revenue-neutral rate was expected to be around 18%, today the average GST rate is about 11.5%, so that clearly is not tenable,” he said.

The actual average GST rate has declined over the years due to several rounds of tax cuts. The revenue-neutral rate is the weighted average tax rate needed for the transition to the GST regime in 2017 without causing a shortfall in government revenue.

In last year’s budget, finance minister Nirmala Sitharaman also announced a new tax regime as an alternative for individual taxpayers where the tax rates are lower, but exemptions are not allowed. However, the new tax regime without exemptions has found few takers so far.

Debroy said that the government could also take steps towards curbing “excessive” regulations regarding entry of businesses, facilitating competition, and ensuring that regulatory structures function efficiently.

On the economy’s growth prospects, Debroy said it has recovered in the current financial year, and economic growth by the end of the fiscal is likely to be around 9.5%.

He, however, noted that some sectors, including travel and tourism, along with other contact-intensive sectors, are yet to revive. However, he expressed hope that these sectors would recover in the next financial year.

“Because some of the contact-intensive sectors and some of the service sectors will revive, in FY23, we will get a growth rate of about 7.5%,” he said.

The ongoing third wave of the pandemic has again put brakes on the recovery trajectory, and rising cases and probabilities of increased restriction measures across states have also impacted the growth forecast for the current fiscal.

Earlier this month, the government pegged the growth estimate for FY22 at 9.2%, lower than that of the Reserve Bank of India, which projected a growth rate of 9.5% in its December monetary policy meeting.

He also noted the fact that the pandemic-hit period has impacted India’s ability to reach the $5 trillion economy target by 2024.

Debroy said that when India was growing at around 9%, the external world was also benign and robust exports boosted the growth rate. However, now, the situation has changed, and although exports have improved, there is a whole range of factors apart from the pandemic affecting exports, such as the growing protectionism across several countries.

Further, the EAC chairman noted that a persistent concern for the economy remains in the urban labour market.

“Growth has recovered, but there are still concerns around the labour market, particularly the urban labour market, and I also have in mind the declining work participation rates.”

He said several issues are plaguing the labour market, including the lack of skills, the lack of correlation between education and skills, and several factors concerning the informal sector.

“As of now, despite the robust growth recovery that I mentioned, there are legitimate concerns. Some of them are immediate, short term. Some of them are longer-term along the lines that I indicated, which mean that the labour market needs to be reformed,” he said.

He said that the Union government has unified over 50 labour codes under four heads of wages, social security, safety and industrial relations. However, many labour laws are outside the ambit of this unification, and they largely fall under the jurisdiction of states.

Responding to comparisons made with the growth rate of Bangladesh, he noted that the eastern neighbour had “unified and cleaned up” its labour laws in 2006, which helped several industries such as those of apparel and garments thrive in the country.

On the target of a $5 trillion economy, Debroy said the Centre and the states need to play a key role to achieve the target.

“If you leave our railways, national highways, telecom, defence, all growth actually happens at the level of the states. Depending on the year, 90-95% of the national income originates in the states. There is plenty of slack within the states to drive that kind of rate of growth of 8.5% summed across the states,” he said.

He said that in terms of poverty alleviation and delivery of public goods and services, a major factor is an identity, and although India has Aadhaar as the identity for individuals, several government schemes are concerned with households.

Debroy said an exercise needs to be done to match these individuals to households to help them effectively benefit from government schemes.

Along with individual identities, he also spoke about the identity of enterprises, including MSMEs.

“All entrepreneurship is not in the corporate sector. There is the MSME sector, which has been through a considerable amount of churn, and one of the problems of the sector is that the enterprise does not have an identity. Almost 95% of them are not registered under any piece of legislation. We probably have a beginning on this through the GSTN numbers.”