January 22, 2019, Economic Times.
India may be eyeing further reforms to lift the tax-to-GDP ratio after putting in place the goods and services tax (GST), one of the country’s biggest policy changes ever.
The tax-GDP ratio is expected to cross 12% in FY19, a new high in over a decade, but lower than emerging market peers. This means expanding a tax base that’s been eroded by large exemptions and carve outs. A simpler, non-adversarial tax regime can help in this regard.
Last Month , After the GST Revision, Our Finance Minister made some Important Take away Regarding Single Tax Regime, ”We should have standard rate instead of two standard rates of 12% and 18%,” he said, two days after the GST Council approved more rate cuts.
“It could be a rate at some midpoint between the two.” A committee headed by then chief economic adviser Arvind Subramanian had, ahead of the GST launch, suggested a revenue-neutral rate of 15-15.5%.
“The country should eventually have a GST which will have only slabs of zero, 5% standard rate with luxury and sin goods as an exception,” Jaitley wrote, cautioning that this will “take some reasonable time when the tax will rise significantly.
“Multiple slabs were fixed transiently in order to ensure the tax of no commodity goes up radically,” he said. “This contained the inflation impact.”
A GST 2.0 would mean moving closer to a single rate structure with fewer exemptions, bringing all sectors within its ambit and a simpler law. Any government will find it politically difficult to tax a Mercedes and salt at the same rate and it may also need to exempt a few items such as the latter altogether. But steps to reduce such divergence would be welcome. “This will require broadening of the tax base by getting petroleum and real estate in its fold, further simplification of tax rates, many legislative interventions and avoiding quick-fix solutions such as selectively restricting the input credit for a particular sector or accommodating state-specific changes, which dilutes the concept of ‘one nation one tax’,” said Pratik Jain, national indirect taxes leader, PwC.
Direct taxes
Direct taxes, which saw a decadal high tax-GDP ratio of about 6% in the previous fiscal, need drastic simplification with minimal exemptions for individuals and businesses That would go well with the ambitious plan of the Central Board of Direct Taxes (CBDT) for jurisdiction-free assessment. A task force has been set up to draft a new tax code but a drastic reduction in rates may not be on cards.
“The main agenda for the new government is likely to be a renewed focus on streamlining processes and removing draconian provisions which have inadvertently crept into both the GST and direct tax laws,” said Kapadia of EY, adding that more likely than big-bang reforms would be the easing of processes and ensuring better compliance.
Raising Tax-To-GDP Ratio
The tax-to-GDP ratio for India has inched up slightly in recent years, but remains well below the world average. The goods and services tax (GST) and demonetisation have helped but more measures may be needed to reduce evasion.
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