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Home / Opinion / Views /  Don’t ignore simplicity as a canon of taxation

That our goods and services tax (GST), hailed by Prime Minister Narendra Modi as a “good and simple tax" on its 2017 launch, needs to be simplified forms a consensus among taxation wonks. The report of the N.K. Singh-led 15th Finance Commission that was tabled in Parliament on Monday alongside the Union budget has a nudge on its multiplicity of tax brackets. It recommends a three-tier GST structure by merging its 12% and 18% slabs into a standard rate applicable to most goods and services, with a 5% merit rate and a 28-30% demerit rate. If the government accepts this proposal, it would be a welcome change. The seven-tier regime that we have is unwieldy and flies in the face of elementary GST principles adopted in other jurisdictions of the world; a country’s chief indirect tax should be uniform, stable, easy for every seller and buyer to remember, and invulnerable to statist discretion. Absolute uniformity is not feasible in India, given our disparities and the regressive impact of indirect levies, but a tax is neither ‘good’ nor ‘simple’ if the logic of its slab-wise categorization is beyond comprehension. As an anomaly-ridden tax system makes space for disputes and hampers compliance, the sooner we simplify it, the better.

True, GST collections hit a record high of nearly 1.2 trillion in January, thanks to an uptick in commerce, an ironing out of glitches and an anti-evasion drive, but that should not stoke complacency. According to the Finance Commission’s report, India has lost about 4 trillion annually on account of low GST rates. Our ‘effective GST rate’ has been just 11.8%, which is short of the ‘revenue-neutral rate’ of 14% that was needed to keep coffers at pre-GST levels. A shortfall in collections blew up into a controversy last year over the Centre’s failure to honour its commitment to compensate states for inadequate revenues, with adequacy defined as a 14% annual growth in GST intake. Covid can be blamed for part of that problem, as finance minister Nirmala Sitharaman memorably did with her “act of God" remark, but in hindsight, it is clear that excessive rate tweaks and category shuffles also ruined the chances of smooth revenue-sharing relations between the Centre and our states.

As those ties remain testy, it is good that the panel has recommended no drop in the share of the central divisible tax pool to be given to states over the next five years. At 41%, it is just a percentage point less than the previous half-decade’s figure, a reduction explained by Jammu and Kashmir’s loss of statehood. Yet, our states are justified in their grouse that the Union government has increasingly resorted to cesses and surcharges, which are kept out of its divisible pool, to raise revenues. Its cess intake has risen from 28,521 crore in 2009-10 to an estimated 2.72 trillion in 2020-21, a near 10-fold rise over the span of a decade. This looks especially unfair in the context of the heavy responsibility that our states bear in the country’s fight against the covid pandemic. Yet, in her budget for 2021-22, Sitharaman proposed a cess on 17 commodities—including diesel, petrol and farm imports—to gather funds for agricultural infrastructure and extra remuneration for farmers. Sure, the purpose is valid. But cesses complicate taxation, just as variable GST rates do, and rarely prove short-lived, as they’re supposed to be. They ought to be phased out. Our economy would be better off without unnecessary tax complexity.

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