The GST structure that has been decided on is too complicated and distortionary for India to reap the benefits of the national value-added tax.
Ideal situation:
There should have been a simple GST structure, with zero taxes on a few essentials, a high tax rate for a few sin goods and almost everything else taxed at a single rate.
Analysis:
India is heading towards a flawed GST structure with multiple tax rates and complex tax structure. This should be a cause of worry for the following reasons,
- The sheer complexity of the GST structure will result in tax disputes, lobbying and corruption in the future
- The second problem with a complicated tax structure is that it will lead to distortions
- A more complicated tax structure will actually increase business costs, while on the other, exemptions will mean cascading of costs because of the absence of input tax credits
What should be done now?
Economic reformers would now have to push for a simpler GST in the coming years. Following are the ways in which it can be done,
- Gradual removal of exemptions: Governments should gradually remove exemptions, on the one hand and equally gradually, bring taxes on most goods and services to a standard rate on the other hand
- Direct tax code: There is now a strong case to push ahead with the direct tax code so that higher collections of income and corporate taxes create fiscal space for a rationalization of indirect taxes