Bibek Debroy has called for a single Goods and Services Tax (GST) rate, arguing that it is the direct tax regime that must be progressive, instead.
"We need to take a call on whether we accept there should be a single GST rate or not. Everyone's mindset is one of trying to control. And, so we decide this particular item is elitist in nature, so the GST rate of this must be higher; this particular item is an item of mass consumption and therefore the GST rate on that should be lower," Debroy said on November 7 at the TIOL Tax Congress 2022.
"The moment we accept this mindset, we allow for differentiation. The moment we allow for differentiation, we allow for subjective interpretation, we allow for litigation. And it is therefore my submission before you that as a polity we need to recognise that the GST rate should be the same regardless of the product," he said.
Debroy, who is the chairman of the Prime Minister's Economic Advisory Council, was speaking in the capacity of an economist and the views he was expressing was not of the Council, nor were they suggestive of any such recommendation made to the prime minister.
The tiered structure of the GST has been a debate since its inception. The indirect tax regime, which completed five years on June 30, has four slabs: 5 percent, 12 percent, 18 percent, and 28 percent. Further, some goods in the 28 percent attract cess, while some goods fall under a nil category.
The government's public stance is that it would like the number of tax slabs to reduce gradually.
However, Debroy said he didn't think India would ever ever get a single GST rate.
Commenting on tax systems and progressiveness, Debroy said it should be direct taxes that must do the heavy lifting. "If progressivity is to be introduced, that is best done through direct taxes, and not indirect taxes. You will notice particularly in Britain, some of the old houses are very dark. The reason they are is at one point in time, windows used to be made out of glass and it was perceived that glass was an item of elitist consumption. So, therefore, you did not want to use glass and, therefore, you had smaller windows," Debroy said, illustrating the distortions caused by a supposedly progressive indirect tax system.
Debroy also said exemptions must be removed from India's tax regimes, especially direct taxes, but not just to make things simpler.
"We must be willing to pay higher taxes or we must be willing to settle for reduced delivery of public goods and services. Every year the budget papers have a statement known as revenue forgone. Depending on the year, it amounts to 5-5.5 percent of GDP. So the moot question is, should those exemptions at all be there?" he said.
"Today, on the personal income tax side and on the corporate tax side, there is a scheme, not mandatory, of opting for an exemption-less regime. In my view, and this is not an official view, this is like jumping a ditch. You cannot jump a little bit of the ditch and hope to jump the rest of the ditch."
According to Debroy, India must at some point agree to move to a completely exemption-less system. Further, any differences between personal income tax and corporate tax systems must also be removed. This would help reduce the administrative costs of compliance and "unnecessary litigation that departments indulge in", among others.