Former finance secretary Vijay Kelkar has recently renewed his pitch for simplification of the “unnecessarily complex” structure of India’s Goods and Services Tax (GST) and called for further democratisation of its administration, and the resource-sharing mechanism. His preference for a single GST rate (12%) hogged the headlines, but a few other suggestions made by the veteran policymaker need greater attention. Kelkar has virtually debunked the practice of setting tax rates “largely with the objective to maintain revenue neutrality”. He called this “counter-productive”, and pointed out that high rates would make it lucrative for the fraudsters to evade taxes. This is when policymakers in the saddle are contemplating to raise the average GST rate by a substantial 5-6 percentage points to the so-called “revenue neutral rate” (which means rate increase for a broad set of goods). Kelkar also advocated “equitable” sharing of GST proceeds among the three tiers of government that includes the local governments (gram/block/zilla panchayats and municipal corporations), and a larger role of states in the GST Secretariat.
These are sage counsels, and would require to be acted upon with a sense of urgency by the new government after the polls, if India were to take its indirect tax reforms to its “natural destination”. Unlike many others, Kelkar doesn’t seem to think that wholesale rate hikes are indispensable to improve the tax-GDP ratio. Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, too, had underlined the need for a less complex, single-rate GST, but he said, “We must either be willing to pay higher taxes or settle for reduced delivery of public goods and services.” Debroy feels that the continuing wide gap (8% of GDP) between tax revenues and the requirement of government spending on infrastructure, education, healthcare and defence, would need to resolved without any further delay, and this might also need higher tax rates.
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Evidence shows revenue mop-up doesn’t require loading (high) taxes onto a narrow base, but a broader base for the levies. Several countries including Japan, South Africa, and Malaysia that have embraced GST regimes over the last decade and more, have kept rates low and bases wide, and seen rise in revenue buoyancy. A broader and enduring consumption revival is essential for meeting India’s goal of sustainable 7%-plus economic growth. The country can’t afford to jack up prices with higher indirect taxes, which are, by nature, regressive.
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Come July, India’s GST will have completed seven years, but the tax reform won’t have yet yielded much incremental fiscal or economic dividends. The GST-GDP ratio remained a lowly 6.2% for five years, and improved to 6.6% in 2022-23, and further to 6.9% in 2023-24. Despite the revenue guarantee enjoyed by them during the first five years of GST, state governments’ “own tax revenues” have stagnated at 6-7% of GSDP over the last decade. The growths envisaged by the last two Finance Commissions (FCs) on tax devolution haven’t been achieved either. During the first four of the 15th FC’s six-year award period, states have lost around Rs 65,000 crore as grants. The local bodies are left high and dry, even though the Constitution was amended three decades ago to empower them fiscally. Kelkar is right when he says that, to deepen democracy and governance at the grassroots level, the states’ say in GST administration, and local bodies’ fiscal base must both increase. But differential tax rates still have relevance for India.
Former finance secretary Vijay Kelkar has recently renewed his pitch for simplification of the “unnecessarily complex” structure of India’s Goods and Services Tax (GST) and called for further democratisation of its administration, and the resource-sharing mechanism. His preference for a single GST rate (12%) hogged the headlines, but a few other suggestions made by the veteran policymaker need greater attention. Kelkar has virtually debunked the practice of setting tax rates “largely with the objective to maintain revenue neutrality”. He called this “counter-productive”, and pointed out that high rates would make it lucrative for the fraudsters to evade taxes. This is when policymakers in the saddle are contemplating to raise the average GST rate by a substantial 5-6 percentage points to the so-called “revenue neutral rate” (which means rate increase for a broad set of goods). Kelkar also advocated “equitable” sharing of GST proceeds among the three tiers of government that includes the local governments (gram/block/zilla panchayats and municipal corporations), and a larger role of states in the GST Secretariat.
These are sage counsels, and would require to be acted upon with a sense of urgency by the new government after the polls, if India were to take its indirect tax reforms to its “natural destination”. Unlike many others, Kelkar doesn’t seem to think that wholesale rate hikes are indispensable to improve the tax-GDP ratio. Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, too, had underlined the need for a less complex, single-rate GST, but he said, “We must either be willing to pay higher taxes or settle for reduced delivery of public goods and services.” Debroy feels that the continuing wide gap (8% of GDP) between tax revenues and the requirement of government spending on infrastructure, education, healthcare and defence, would need to resolved without any further delay, and this might also need higher tax rates.
Evidence shows revenue mop-up doesn’t require loading (high) taxes onto a narrow base, but a broader base for the levies. Several countries including Japan, South Africa, and Malaysia that have embraced GST regimes over the last decade and more, have kept rates low and bases wide, and seen rise in revenue buoyancy. A broader and enduring consumption revival is essential for meeting India’s goal of sustainable 7%-plus economic growth. The country can’t afford to jack up prices with higher indirect taxes, which are, by nature, regressive.
Come July, India’s GST will have completed seven years, but the tax reform won’t have yet yielded much incremental fiscal or economic dividends. The GST-GDP ratio remained a lowly 6.2% for five years, and improved to 6.6% in 2022-23, and further to 6.9% in 2023-24. Despite the revenue guarantee enjoyed by them during the first five years of GST, state governments’ “own tax revenues” have stagnated at 6-7% of GSDP over the last decade. The growths envisaged by the last two Finance Commissions (FCs) on tax devolution haven’t been achieved either. During the first four of the 15th FC’s six-year award period, states have lost around Rs 65,000 crore as grants. The local bodies are left high and dry, even though the Constitution was amended three decades ago to empower them fiscally. Kelkar is right when he says that, to deepen democracy and governance at the grassroots level, the states’ say in GST administration, and local bodies’ fiscal base must both increase. But differential tax rates still have relevance for India.
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Fiscal democracy
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18.04.2024
Former finance secretary Vijay Kelkar has recently renewed his pitch for simplification of the “unnecessarily complex” structure of India’s Goods and Services Tax (GST) and called for further democratisation of its administration, and the resource-sharing mechanism. His preference for a single GST rate (12%) hogged the headlines, but a few other suggestions made by the veteran policymaker need greater attention. Kelkar has virtually debunked the practice of setting tax rates “largely with the objective to maintain revenue neutrality”. He called this “counter-productive”, and pointed out that high rates would make it lucrative for the fraudsters to evade taxes. This is when policymakers in the saddle are contemplating to raise the average GST rate by a substantial 5-6 percentage points to the so-called “revenue neutral rate” (which means rate increase for a broad set of goods). Kelkar also advocated “equitable” sharing of GST proceeds among the three tiers of government that includes the local governments (gram/block/zilla panchayats and municipal corporations), and a larger role of states in the GST Secretariat.
These are sage counsels, and would require to be acted upon with a sense of urgency by the new government after the polls, if India were to take its indirect tax reforms to its “natural destination”. Unlike many others, Kelkar doesn’t seem to think that wholesale rate hikes are indispensable to improve the tax-GDP ratio. Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, too, had underlined the need for a less complex, single-rate GST, but he said, “We must either be willing to pay higher taxes or settle for reduced delivery of public goods and services.” Debroy feels that the continuing wide gap (8% of GDP) between tax revenues and the requirement of government spending on infrastructure, education, healthcare and defence, would need to resolved without........
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