India introduced Goods and Services Tax (GST) to supersede various indirect taxes, such as excise duty, value-added tax (VAT), service tax, and luxury tax, thus simplifying the taxation process. GST is a value-added tax that consumers pay, but businesses send these payments to the government. GST is a consumption tax because it applies to domestic consumption and is imposed at the final consumption point. The 101st Constitution Amendment Act of 2016 introduced GST.
Presently, the GST system includes categories such as the Central GST (CGST) that includes excise duty and service tax and the State GST (SGST) covering VAT and luxury tax. The Integrated GST (IGST) handles inter-state trade and is a system that coordinates state and union taxes rather than being a direct tax. The GST structure contains four slabs: 5%, 12%, 18%, and 28%. Special levies apply on specific demerit and luxury goods, which falls within the 28% range.
Role of the GST Council
Article 279A of the Indian Constitution states that the President of India forms the GST Council to administer and govern GST. It has a chairman, the Union Finance Minister of India, and members nominated by state governments. Designed to include both central and state governments, the center has 1/3rd voting power while the states hold 2/3rd. Decisions are taken by the agreement of 3/4th of the council.
Reforms Suggested in GST and Framework
Recently, the Chairman of the Prime Minister’s Economic Advisory Council stated that India should have a ‘Single Goods and Services Tax (GST) Rate’ and an ‘Exemption-less Tax Regime’. This suggestion calls for a unified GST rate on all goods, as progressive tax rates function optimally with direct taxes and not indirect taxes. The National Council of Applied Economic Research (NCAER) estimated a 1.5% to 2% increase in Gross Domestic Product (GDP) when GST was first announced. This prediction assumed that GST would apply to all goods and services.
However, different GST rates have led to a ‘prime control’ mindset. In other words, GST rates are higher for items perceived as elitist and lower for items bought by the masses. This disparity results in differentiation, subjective interpretation, and litigation. Based on this, the chairman recommended that tax rates should exceed their current average of 11.5%, contrary to the previously estimated 17% revenue-neutral GST rate.
The Importance of an ‘Exemption-less’ Direct Tax Regime
The chairman also advocated an exemption-less direct tax regime. While tax evasion is illegal, tax avoidance through using exemption clauses to reduce tax burden is legal. However, more tax exemptions lead to an increased number of tax complications. He further argued that the artificial difference between corporate taxes and personal income taxes (PIT) should be removed, as many unincorporated businesses pay under PIT.
By removing differences through an exemption-less direct tax system, administrative compliance can be reduced. This can lead to a more efficient and fair taxation system for individuals and businesses across the country, encouraging economic growth and reducing disparities in the tax system.