Wednesday, August 8, 2018-The International Monetary Fund described the Goods and Services Tax (GST) as a “milestone reform” in India’s tax policy.
In its annual country report, the International Monetary Fund computed 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. However, India belongs in a small group of five countries having four or more GST rates: four non-zero rates of five per cent, 12 per cent, 18 per cent, and 28 per cent; special low rates of three per cent on gems and jewelry and 0.25 per cent 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.
The IMF reported, “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. The multiple rate structure and other features of India’s GST environment could give rise to high compliance and administrative cost. Yet, the GST has a complex structure with a relatively high number of rates which could be simplified without sacrificing progressivity of the current GST and with potentially significant gains from lower compliance and administrative costs”.
The IMF also added,“ 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 revenue-neutral 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”.