Is A Single-Rate GST Possible For India? Of Course, And Here’s How It Can Be Done

Golmal hai bhai sabh golmal hai! That was the response of a frustrated retailer when he was filing GST for the different items sold over the last month, all of which had different GST (Goods and Services Tax) rates.

While multiple rates existed even during the time of Value Added Tax, the idea of the GST was to make the system far simpler than the prevailing taxation regime.

Is the GST better than the previous regime of indirect taxation in India? Absolutely yes, the current system is simpler; however, some procedural and compliance-related issues have made it appear to be more complex than the previous taxation scenario.

The Finance Minister recently held a meeting with several taxation experts to look at some of these complications and problems associated with the digital platform for filing of GST returns.

The fact that the GST scheme has seen so many iterations over the last couple of years is a proof of the responsiveness of our government in addressing problems faced by businessmen.

But if retailers are still finding issues associated with filing GST then there’s still work to be done. One of the easiest ways to simplify the GST would be to move towards a single rate for all items.

This would be the best form of indirect taxation regime, which would further bring down non-compliances and benefit businesses whether they’re small, big or medium.

However, the argument against a single rate GST was that it goes against the principle of progressive taxation – and that how can a Hawai chappal and a BMW be taxed at the same rate.

My views on taxation policies have evolved and I believe that rationality is more important as a concern than morality. That is, taxation policies should be designed such that they maximize revenue for the government rather than those that aim at redistribution.

For redistribution, we can use higher government resources and efficiently allocate them as desired. But, maximizing government revenue entails a tax rate that is optimal -- the highest rate that is seen as low enough for tax evasion to be minimal.

Therefore, the goal must be to have a rate that ensures higher tax revenue due to better compliance.

It is only natural that a single tax rate would result in much better compliance than the prevailing multiple-tax structure. The icing on the cake is that it is also possible to have a taxation structure that addresses the argument for not taxing a hawai chappal and a BMW at the same rate.

Dr Arvind Virmani -- former Chief Economic Advisor to the government of India and the Executive Director for India at the International Monetary Fund -- has been arguing for a simpler GST structure for several months now.

He argues for a three-rate structure that is so easy that it can be computed by anyone with a basic working knowledge of Microsoft Excel. Such a structure will be a big taxation reform and so far, we’ve seen several big-bang taxation reforms by the Modi government.

The present slowdown is indeed an opportunity to bring together states and start a discussion around a simpler GST structure.

But how can a single taxation rate address concerns of taxing chappals and BMWs at the same rate?

A simpler version of the GST structure with a single rate can be such that it has a list of goods that are exempted from GST, i.e., items that are taxed at 0 per cent. The next slab is for most other items, with a single rate of 15 per cent or any rate between 12-18 per cent.

The government can introduce a surcharge or a cess, on commodities that it considers as luxury items, of up to 10 per cent. This ensures that a bulk of the commodities are taxed at a single rate.

In order to achieve this, we will have to get rid of the 5 per cent tax slab and merge the 12 and 18 per cent slabs. There would be a need to reorganize some items and the critical point would be to continue with the commitment of keeping most commodities within the single tax rate and outside the cess.

Moreover, there’s an urgent need to commit to a stipulated GST structure in order to avoid frequent changes in tax rates. Therefore, if such a GST overhaul is to be brought in, it should be brought in ideally from the start of a new financial year.

Given that the budget is due in February, which is just a little over two months away from now, we’ve just the precise amount of time to prepare the necessary ground-work and bring states together to push for a single-rate GST system along with a cess for luxury items.

The present slowdown is in itself an opportunity to move towards an ideal GST system and it will result in a big boost for GST collections, not just for the central government but also for the states.

A single-rate GST is pretty much possible in India. More importantly, it is urgently required for a complex and large economy like India. Therefore, the question is not if it is possible but instead, when will it happen!