Economic Survey: GST to be major milestone in indirect tax reform

The Narendra Modi government has been keen to push theGoods and Services Tax (GST) in bringing about tax reforms and Finance Minister Arun Jaitley recently met the state finance ministers on the new indirect taxes regime which will subsume various levies like excise, service and various local taxes.

According to the Economic Survey published by the Ministry of Finance today, GST will be “the major milestone” in the indirect reformin India that can improve the ease of doing business and promote efficiency.

India’s complex tax system suffers from problems in both structures and administration. “Uneven and high tax rates of similar economic activities have induced distortions in the behaviour of firms and households”, notes the survey.

Why is GST so important? The survey report notes that replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly.

“This will improve the competitiveness of production and export from India,” it noted.

Earlier, a Firstbiz article noted thatabolishing all taxes barring IT and GST is a good idea.

“How do we obtain 12 percent of GDP? We need a tax system that would yield 12 percent of GDP. The puzzle lies in doing this at the lowest possible distortion of the economy. The distortion caused by a tax goes up sharply when the rate is raised, in proportion to the tax rate squared. An income tax rate of 20 percent is four times more distortionary when compared with an income tax rate of 10 percent. For this reason, it would make sense to have two taxes: the income tax on individuals and the GST. By having two taxes and not one, each rate can be lower,” notes the Firstbiz article.

The survey report also notes that it needs to implement DTC as a ‘clean modern replacement’ for existing Income Tax laws.

“As with the GST, the key objective must be a simplification with a clean conceptual core, and the removal of a large number of special cesses and exemptions that favour special interest groups,” notes the report.

The government believes that DTC will yield gains by removing distortions of individual and corporate decision making, reducing compliance cost and litigation, and improving tax collections.