The introduction of GST might be the most important tax reform. It was a unique experiment in cooperative federalism, where both the Union and the state governments gave up their tax autonomy in favor of harmonizing domestic trade taxes. However, some negative features have been inserted into the tax to make it acceptable.
Single rate structure of GST
The single rate structure has been more acceptable and beneficial globally, because,
Firstly, it simplifies the tax structure.
Secondly, it prevents misclassifications and litigations due to multiple rates.
Third, it avoids an inverted duty structure of taxes on inputs. India has this structure on items like electrical transformers, railway wagons, some textile products, plastic bags, and solar modules.
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An inverted duty structure comes up in a situation where import duties on input goods are higher than on finished goods.
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Fourth, the main argument in favor of rate differentiation is equity. However, it is an inefficient way of targeting benefits for the poor. Poor consume more exempted and low-rated items. Furthermore, the ideal way of targeting the benefits to the poor is on the expenditure side, through targeted cash transfers.
Fifth, it will end the lobbying by manufacturers for placing their products in the low tax rate category.
How the present tax collections have improved then?
GST revenues have increased significantly, with collections of over Rs 1 lakh crore in the last 10 months and touching a record of Rs 1.68 lakh crore in April 2022.
However, economic recovery or tax structure is not the reason. The GSTN has been able to stabilize the technology platform. Making e-invoicing mandatory for all businesses above Rs 100 crore has made the detection of fake invoices easy that were used to claim the input tax credit.
This has helped to improve tax compliance and has also enabled better enforcement.
Road ahead
It would be desirable to have a single rate of tax, besides exemptions on unprocessed food items, in the long run. However, in the short run, 12 percent and 18 percent categories should be merged into a 15-16 percent slab. 28 percent category should be removed altogether.
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