Strategy for GST reforms: Direction and speed

The argument that the tax system has settled and therefore no longer needs reforms is fallacious

- M GOVINDA RAO

In my last column (Business Standard, September 12, 2024), I argued for initiating second-generation reforms in the Goods and Services Tax (GST) system to make it simpler, more transparent, and less cascading. Reforms are necessary to make the consumption tax system more comprehensive, less distortionary, and export competitive.

Enhancing the revenue productivity of the tax system and reducing cascading in the consumption tax is important to achieve the aspirational goal of reaching the developed country status by 2047. Tax reforms tend to be more successful when the economy is on the upswing, as the risk of revenue loss is lower. The three important suggestions made are (i) restrict the exemption list to perishables and necessities; (ii) reduce the number of tax rates to two, with a third rate reserved for sumptuary or "sin" goods, without sacrificing revenues, and (iii) extend GST to currently excluded items -- namely, petroleum products, electricity, and real estate to make the self-enforcing system more comprehensive.

Admittedly, it is difficult to carry out the "Big Bang" reforms in tax policy in India. Therefore, what is sought is a directional change toward achieving a simpler and more efficient consumption tax system. There is a general principle in public choice theory that the larger the number of coalition partners, the more difficult it is to make decisions due to multiple preferred choices. Naturally, with the Union government and all the states and Union Territories (with legislatures) being a part of the GST Council's decision-making process, it is not easy to implement game-changing reforms. However, if the required directional change is clear, gradualism can work towards achieving what is desired eventually.

Unfortunately, what has been done so far is merely tinkering with the system without clear directional changes toward greater simplicity, transparency, and minimising the costs of collection, compliance, and distortions.