GST reform: Some correctives a new move

The goods and servicestax(GST) 2.0 unveiled by the central government has certainly simplified the rate structure and has rectified some of the anomalies — one beingthe inverted duty structure in the textile and fertiliser sectors.

- VS KRISHNAN

The scope for classification disputes has been significantly reduced with all food items coming underthe 5 per cent rateslab instead of the earlier 5and 12 percentslabs.

However, while evaluating the GST reforms, the fundamental goal must not be forgotten. It was to raise the GST tax-to-GDP ratio by widening the taxbase, byimproving compliance, by ensuring a duty trail from raw materials to retail, and by including all sectors of the economy within the GST ambit.

In this larger objective, the failure is evident. In the pre-GST period, the GST tax-to-GDP ratio covering all the taxes later subsumed in the GST was at an average of 6.2 percent. This has fallen to 5.8 per cent post rationalisation. This ‘was partly due to the reduction in the incidence of duties, which fell from 14.8 percent pre-GST to about 11.8 per cent, and now further down to10.5 percent after the rationalisation. This has made the task of raising the GST tax-to-GDP ratio much harder. This ratio has stagnated between 17 and 18 per cent of GDP over the last two decades. The expectation was that post GST reforms, the GST tax-to-GDP ratio would go up from 6.2 per cent pre-GST to at least 7.2 per cent. Now much of the efforts have to come from the direct tax side, especially personal income tax where there is still sufficient scope.

The challenge nowisto raise the ratio byacombination of measures such as increasing the incidence of duties on sin goods like cigarettes, online gaming, pan masala, and high-end cars. The other measure could be to raise the duty on gold and gold jewellery to 5 per cent from the current 3 percent.