Indian polity should take a call on having a GST system with a single rate, regardless of the product, Bibek Debroy, Chairman of the Economic Advisory Council to the Prime Minister (PMEAC), has suggested.
Citizens should also be willing to pay higher taxes or settle for reduced delivery of public goods and services, given the wide gap between the total tax-GDP ratio and the demand for resources by the government to meet physical, social infrastructure, education, and health requirements, Debroy said at the TIOL Tax Congress 2022 in the capital on Monday.
“As a polity, we need to take a call on whether there should be a single GST rate or not. My submission is that there should be a single rate. I don’t think we will ever get it, and that is what we should want,” Debroy said.
“As a polity, we need to recognise that the GST rate should be the same regardless of the product.”
Debroy highlighted that the total tax-GDP ratio (Centre and States combined) comes to 15 per cent even as the demands for government spending on physical and social infrastructure are estimated at about 23 percent of GDP.
There is already demand that the government spend 6 per cent on education, 4 per cent on health, 10 per cent on infrastructure, and 3 per cent on defence, he noted. “Today, tax collection is at 15 per cent,, our demands are at 23 per cent of GDP. Obviously something has to give,” Debroy added.
Debroy also said that progressivity has to be introduced through direct taxes and not through the GST (indirect taxes).
“Even today, there are items outside the GST net,” he noted.
Debroy’s suggestion for a single GST rate is significant, although he sought to downplay it as his view as an economist and citizen, as the current regime has four main slabs: 5, 12, 18, and 28 per cent.
He highlighted that the estimate of the GST revenue neutral rate (RNR) made by the Department of Economic Affairs before the GST rollout was 17 per cent, but the average GST rate at present is 11.5 per cent.
EXEMPTION LESS SYSTEM
Debroy also suggested that India must at some point agree to move to a completely exemption-less tax system, noting that exemptions are making the system complex.
“We must do away with tax exemptions and go in for a simple tax structure (both direct and indirect) devoid of all exemptions,” he added.
The revenue foregone by the government because of exemptions is currently about 5—5.5 per cent of GDP, Debroy added, referring to the figures in the budget documents.