What challenges might arise in creating a GST system that is both simple and supportive of economic growth?
There is a call for GST 2.0 to be a 'Good and Simple Tax' rather than one that suppresses growth. I want to explore the complexities and trade-offs in designing such a tax system.
The Goods and Services Tax (GST) was introduced in India to simplify the indirect tax structure and promote economic growth by creating a unified national market. However, designing a GST system that is both simple and conducive to economic growth presents several challenges and trade-offs.
- Multiplicity of Tax Rates: Having multiple tax slabs (5%, 12%, 18%, 28%) complicates compliance and classification, but a single rate may not suit the diverse consumption patterns and income levels in India.
- Complex Compliance Requirements: Frequent filing of returns, invoice matching, and e-way bills can be burdensome for small businesses, even though such measures are intended to curb tax evasion and improve transparency.
- Inclusion of Excluded Sectors: Petroleum products, alcohol, and real estate are currently outside GST, leading to cascading taxes and inefficiencies. Including them would simplify the tax system but faces political and logistical hurdles.
- Revenue Concerns for States: States fear loss of fiscal autonomy and revenue, which makes them hesitant to agree to further simplification or rationalization of rates.
- Balancing Centre-State Interests: The GST Council must balance the interests of the Union and States, which can slow decision-making and complicate reforms aimed at simplification.
- Addressing Informal Sector: A simple GST may not adequately capture the informal sector, risking revenue leakage, but too much regulation can stifle small entrepreneurs.
- IT Infrastructure and Digital Divide: Reliance on technology for GST compliance can exclude those with limited access to digital infrastructure, especially in rural areas.
- Frequent Policy Changes: Frequent amendments and notifications create uncertainty and complexity for businesses, even if they are meant to address practical issues.
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