For a tax reform that was rung in at the stroke of midnight, echoing independence, with a special sitting of Parliament held to mark the occasion, our goods and services tax (GST) has largely been a let-down. Launched on 1 July 2017, it was advertised as a single tax for one nation, a move that would support national integration and give the economy a fillip. This was to be a “good and simple tax", one that would subsume a jumble of indirect taxes levied by the Centre and various states, the latter varying so widely from one state to another that it often took a battalion of experts for a company to work out its liabilities. Good, the tax has clearly been in some ways. As envisaged, the GST put an end to much of the earlier compliance headache for businesses. It also reduced tax evasion, did away with check posts at state borders, and closed avenues for cross-border tax arbitrage, thus squeezing the low-level corruption associated with all this in the pre-GST era. Since the GST was only applicable to value addition, many enterprises have gained from tax credits for taxes already paid on inputs. They no longer worry about a cascade of levies upon levies pushing up costs all along their supply chains. The GST was expected to raise efficiency and lower final prices, a goal it has not entirely failed. Yet, on simplicity, it has fallen badly short. Three years on, this seems like an appropriate time to relaunch it.
One principle that has held steady since the dawn of taxation is this: a tax that attracts penalties for non-payment must be easy for taxpayers to grasp. Globally, the birth of GST can be traced to the idea of rolling all indirect levies into a common tax—at a single rate. In India, we remain wedded to the concept of progressive taxation, by which the rich must bear a heavier burden than the poor, and so a single-rate GST was not feasible. But still, in only three years, some 500 items have seen rate tweaks. In all, we have at least seven GST slabs now. This defeats the canon of simplicity. The classifications tend to be arbitrary, which means that slab allotment is susceptible to political patronage. Instead, it would be best to impose just one rate on most goods and services, with a few “merit" items asked to pay half that rate and a few unhealthy or luxury purchases coughing up twice the rate. A basic GST rate held steady over the years would signal policy stability, something India is in need of. If the merit and “demerit" categories are well chosen, no one would be able to question the tax system’s integrity either.
Any rejig of taxation could imperil fiscal calculations. This year’s budget arithmetic, however, has already been thrown into disarray by the covid crisis. The GST system clearly needs an overhaul, and it would be better to do it now, while tax revenues are in flux, than risk further disruption once the economy recovers. Ideally, alcoholic drinks and petroleum products should be under the GST net, too. So long as various administrations remain addicted to special levies on these to fill their coffers, this might take years to achieve, but it would help if a switchover target were set right away. Any GST system ought to be comprehensive in coverage. Of course, a range of technical glitches need to be fixed as well. The software systems in use are too complex for individuals and modest businesses, and input credits are hard to get. But first, let’s fix the basic contours of India’s biggest tax reform since 1947.