IMF Dig At In­dian GST

GST has a com­plex struc­ture, which could be sim­pli­fied without leav­ing pro­gres­siv­ity of cur­rent GST and with sig­nif­i­cant gains from lower com­pli­ance and ad­min­is­tra­tive costs

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The IMF has de­scribed the Goods and Ser­vices Tax (GST) as a “mile­stone re­form” in In­dia’s tax pol­icy, but pushed for a sim­pli­fied struc­ture, say­ing the mul­ti­ple rate struc­ture and other fea­tures could give rise to high com­pli­ance and ad­min­is­tra­tive costs.

In its an­nual coun­try re­port, the IMF also said that a dual rate struc­ture with a low stan­dard rate and an ad­di­tional higher rate on select items can be pro­gres­sive and pre­serve rev­enue neu­tral­ity.

The GST is an in­di­rect tax levied on the sup­ply of goods and ser­vices in In­dia. It came into ef­fect on July 1, 2017.

The IMF said that GST is a mile­stone re­form in In­dia’s tax pol­icy, tak­ing the im­por­tant step of uni­fy­ing and har­mo­niz­ing nu­mer­ous in­di­rect taxes across all states of the fed­er­a­tion and the cen­tral govern­ment.

“Yet, the GST has a com­plex struc­ture with a rel­a­tively high num­ber of rates (and ex­emp­tions), which could be sim­pli­fied without sac­ri­fic­ing pro­gres­siv­ity of the cur­rent GST and with po­ten­tially sig­nif­i­cant gains from lower com­pli­ance and ad­min­is­tra­tive costs,” it said.

A dual rate struc­ture with a low stan­dard rate and an ad­di­tional higher rate on select items can be pro­gres­sive and pre­serve rev­enue neu­tral­ity, while stream­lin­ing ex­emp­tions would fur­ther con­trib­ute to pro­gres­siv­ity and re­duce com­pli­ance and ad­min­is­tra­tive costs, the IMF rec­om­mended.

The IMF said that with the con­sump­tion bas­ket of the rich taxed at higher rates than that of the poor, the GST as presently de­signed has an effective tax rate ris­ing with house­hold con­sump­tion. A rev­enu­eneu­tral re­duc­tion in the num­ber of rates would raise the effective rates for poorer house­holds while re­duc­ing those for richer house­holds. This is the key cost of mov­ing to a sim­pler sys­tem, it ar­gued.

In its re­port the IMF said the im­ple­men­ta­tion of the GST led to the key step of har­mo­niz­ing in­di­rect tax rates on goods and ser­vices that pre­vi­ously dif­fered across dif­fer­ent states and the cen­tre and brought ser­vices into the state tax net.

How­ever, In­dia be­longs in a small group of five coun­tries hav­ing four or more GST rates: four non zero rates of 5 per­cent, 12 per­cent, 18 per­cent, and 28 per­cent; spe­cial low rates of 3 per­cent on gems and jew­ellery and 0.25 per­cent on rough di­a­monds; and a GST “cess” levied on de­merit goods. In com­par­i­son, among 115 coun­tries with VATs, 49 have a sin­gle rate and 28 have two rates, it noted.

“The mul­ti­ple rate struc­ture and other fea­tures of In­dia’s GST en­vi­ron­ment could give rise to high com­pli­ance and ad­min­is­tra­tive costs, it said.

The goods and ser­vices tax cre­ated a uni­fied na­tional mar­ket for the first time by low­er­ing in­ter­nal bar­ri­ers to trade – ef­fec­tively es­tab­lish­ing a free trade agree­ment for a mar­ket of over 1.3 bil­lion peo­ple, said Ranil Sal­gado, IMF mis­sion chief for In­dia.

The tax is also ex­pected to in­crease the amount of eco­nomic ac­tiv­ity tak­ing place in the for­mal sec­tor of the econ­omy – lead­ing to bet­ter qual­ity and more re­li­able jobs, he added.

“As a re­sult, the goods and ser­vices tax should im­prove pro­duc­tiv­ity and boost medium term po­ten­tial growth, while also cre­at­ing room for the govern­ment to in­crease much needed so­cial and in­fra­struc­ture spend­ing,” Sal­gado added.

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