GST Needs Wider Net, Lower Rates

Its grand success requires that the tax burden be moderate, coverage comprehensive, administration use cutting-edge technology, and dispute resolution swift and fair

- AJIT RANADE ECONOMIST

HE FIRST comprehensive tax reform committee was set up in 1991 under the chairmanship of Raja Chelliah. That committee's goals were to simplify the tax code, lower the rates and improve tax administration. It also addressed the unfair skew in India's tax system, wherein the indirect to direct tax ratio was 85:15, which had to go much below 50:50.

A fair tax system requires that a richer person pays more than a poorer person, and that two persons earning the same income, irrespective of the source, roughly pay the same income tax. The journey toward a fair tax system in India is far from complete. Only 2% of India's population pays non-zero income tax. But almost everyone is subject to indirect taxes. The indirect to direct tax collection ratio is still too skewed. Indirect taxes do not depend on the income of the payer and hence tend to hurt the poor more than the rich. That is why they are called regressive, and unfair.

The Chelliah committee's road map for reform of indirect taxes was first to move toward a rational value added tax (VAT) which eventually paved the way to the Goods and Services Tax (GST). An important milestone in this journey was the Kelkar Tax Force on tax reforms set up in 2001, which, among other things, had recommended a median rate of 12% for GST, with a simple slab structure.