Aim is to move towards three-tier GST: Bibek Debroy

The ultimate goal of the goods and services tax (GST) is to move towards a three-tier tax structure, said Bibek Debroy, Chairman of the Prime Minister’s Economic Advisory Council, on Friday. 

“One must appreciate that GST is only the beginning of a process. There is a terminal goal,” which was to decentralise long-term fiscal and political objectives and move towards a three-tier tax structure, said Debroy on the sidelines of an one-day symposium on future of India, organised by Indira Gandhi Institute of Development Research.

GST was introduced in July 2017, with five tax rates — 5 per cent, 12 per cent, 18 per cent, 28 per cent and 0 per cent — for various social and economic schemes. Some experts have said the rates were too many. “Obviously the system is not perfect today because several products are outside the GST, and we have too many rates. But one must recognise and (gauge) this system against what used to exist,” Debroy told the media at the sidelines of the event.

However, the problem of exemptions persists, and efforts are on to eliminate indirect tax exemptions beyond a certain threshold. “On the tax side, whether it is direct or indirect, the single most important problem is exemptions. Until you reduce the exemptions, tax-GDP ratio is not going to go up and compliance costs are not going to come down,” said Debroy.

On the direct tax side, the finance ministry recently set up a six-member task force to draft a direct tax code, to which the chairman of the PM-EAC said, “What they will look at is too early to say. But it is a reasonable guess that in the process, because their task is to simplify the Income-Tax Act, they will also look at the question of exemptions.”

The task force’s recommendations are expected to come in six months.

The combined revenue foregone on direct and indirect taxes for 2015-16 was estimated at Rs 2,87,100 crore and for 2016-17 at Rs 3,18,348 crore. The revenue foregone due to tax evasion amounted to five per cent of gross domestic product (GDP). When state governments’ numbers were combined, the revenue loss was about 22 per cent of GDP, he said.

For the Union government, GST collections slowed in September and October at Rs 92,000 crore and Rs 83,346 crore, respectively. However, with the GST Council announcing on November 10 that the rates of nearly 200 items have been slashed, November and December collections were expected to be better.

However, after the implementation of the GST, there has been a shortfall in revenues for state governments. The collections for October 2017 were Rs 7,560 crore, down from Rs 12,208 crore in August. There is some optimism as the average shortfall in GST revenue for state governments decreased to 17.6 per cent in October from 28.4 per cent in August. The estimates of indirect taxes forgone in 2015-16 fell by almost 70 per cent, while the estimate have been revised down to Rs 1,48,442 crore in the 2017-18 Budget documents.