Efficacy of reforms: Myth and reality

THE PRESENT ROUND of reductions in GST rates is a populist measure with an eye to the imminent state elections.

- Thomas Isaac

The hype that is being made about its potential benefits to the consumer and the economy are more myths than reality.

Myth 1: India's GST rates are too high and an impediment to acceleration of growth.

Reality: The weighted average rate of GST in 2017 was only 15.3%, which was much below the combined burden of central excise and service tax and a plethora of state indirect taxes and their cascading effect. The successive reductions in GST rates, including the current one, have reduced the weighted average to 9.8%, which is one of the lowest rates of indirect tax internationally.

The European countries operate under variants of the VAT system with a minimum standard rate of 15%. The average for EU-27 is approximately 21%. BRICS have both GST and VAT. Average standard rates for Brazil, Russia, China and South Africa are 17%, 20%, 13% and 15% respectively. The average of BRICS including new members would be above 14%.

It is well known that India's tax-GDP ratio is much lower than the developed countries, whose average is 34.1%. India's ratio of 11.7% (around 18% for Centre and states combined) is lower than other BRICS countries that have a tax-GDP ratio of around 20%.

High tax rates must be seen from the perspective of the economic role of the state, particularly with reference to redistribution. Small wonder, India, one of the fastest growing economies, is at the bottom of every global development index.