Course Correction

Context: Poor implementation and inadequate planning of Goods and Services Tax (GST) needs to be addressed urgently.

Problems in Goods and Services Tax (GST) Regime

• Lower revenue mobilization: GST collection net of compensation cess was at 5.1% of GDP in 2019-20.
• Multiplicity of rates: has resulted in an inverted duty structure which in turn has affected revenues and ease of doing business.
  • For instance, companies are creating smaller cars and losing on exports because taxes on cars beyond a certain size go up to 45-50%.
• Poor compliance: due to electoral reasons and poor information technology support; (now being addressed with the spread of e-invoicing) 

Way Forward: 

• Get back to the revenue-neutral rate: Fifth Finance Commission has suggested merging the 12 and 18% slabs and has a three-rate structure.
• Simplify GST system: (to boost revenues) attain GST revenue worth about 7% of GDP in the medium term (as suggested by FFC) and review goods taxed at higher rate.

Conclusion: Higher revenue mobilization through GST is a must to address the issue of the expected expansion of debt-GDP (90%) and improve the low and stagnant tax-GDP ratio of India.