WHY GST IS NO LONGER A GOOD AND SIMPLE TAX

A simple rate structure with a broad base is crucial for a tax system. The GST Council must make the structure more stable and the administration friendlier to taxpayers

- PARTHASARATHI SHOME

THE GST was to be a 'good and simple tax' when introduced in 2017 after a decade in preparation. After the latest meeting of the GST Council, it is difficult to perceive it as such. Time was spent on reporting on new revenue collection from 'demerit' goods such as gambling, horse racing and the like, while reporting on rate rationalisation was relegated to an anticipated report from a group of ministers.

This reverse prioritisation of revenue over rates revealed that the GST has been misunderstood. The GST is not a tax whose foundation is revenue collection.

It is a tax whose first objective is to minimise distortions in the market caused by high and multiple tax rates, achieve a large and uniform tax base, and guarantee that taxes paid on inputs are refunded to suppliers (producers and sellers) in the production-distribution process.

This ensures that any tax paid on inputs does not get embedded in its outputs, that is, there is no hidden 'tax on tax' or, in tax terminology, no 'cascading'. Without that, productive activity takes place through hurdles and obstacles that the suppliers of goods and services suffer.

Once the correct base and rate structure is set, automatically, the GST should become a good revenue generator. That is because it should reduce economic distortions as tax cascading is cut down when credit is given to any supplier for the tax he has paid on his purchases. The smooth supply chain thus generated should ensure economic growth with minimum market hindrances caused by taxes.