What could be the long-term effects of implementing a two-rate GST tax slab on India’s economy and tax compliance?

The Goods and Services Tax (GST) in India currently has multiple tax slabs, which has often led to complexity and compliance challenges. The GST Council’s decision to move towards a simplified two-rate tax slab aims to make the system more efficient and user-friendly. This reform could have several long-term effects on India’s economy and tax compliance:

• Improved Tax Compliance:
  • Simpler tax structure reduces errors and confusion, making it easier for businesses to comply.
  • Lower compliance costs and paperwork may encourage more businesses, especially small and medium enterprises, to join the formal economy.
  • Reduced disputes and litigation due to clearer classification of goods and services.
• Boost to Economic Growth:
  • Uniform tax rates can reduce distortions in production and consumption decisions, leading to improved resource allocation.
  • Businesses can better plan investments and pricing strategies, potentially increasing competitiveness and growth.
  • Encouragement of interstate trade by reducing tax-related barriers and complexities.
• Impact on Government Revenue:
  • Initially, there may be revenue fluctuations as rates are rationalized, but over time, a broader tax base and better compliance could stabilize or even increase collections.
  • Less scope for tax evasion due to simplified structure and reduced classification disputes.
• Business Behavior and Investment:
  • Predictable and transparent tax rates can increase investor confidence, both domestic and foreign.
  • Reduction in compliance burden can free up resources for business expansion and innovation.
• Challenges and Equity Concerns:
  • Setting appropriate rates is crucial to avoid regressive impacts, especially on essential goods and services consumed by lower-income groups.
  • Some sectors may experience higher taxes or lower input credits, requiring careful transition management.