Less exempted good, by raising rates bad

The Goods and Services Tax (GST) Council’s move to remove exemptions and the inverted duty structure on products is sound. But achieving this by raising rates is not. From July 18, goods and services ranging from pre-packaged unbranded food, cheques and hospital beds will attract higher GST.

The levy leaves digital footprints in the income and production chain that allows manufacturers to claim credit on the taxes paid on inputs. Exemptions disrupt this chain and clutter the tax system. An inverted duty structure — where the tax rate on inputs is higher than that on the output — leads to a pile-up of input tax credits (

) and problems in claiming refunds, blocking the working capital for manufacturers.

That will ease. Reform should have entailed lowering the tax rates on inputs rather than raising those on the output, which jacks up costs and impacts consumers who are facing the brunt of inflation. Rate changes should be preceded by rigorous data analysis.

Earlier, an RBI report showed that rate cuts led to the weighted average GST rate dropping from 14.4% at the time of the GST rollout to 11.6% in 2019, denting collections. But multiple slabs make the tax system inefficient. Convergence of rates — lower and fewer rates — will improve compliance.

The GST Council must act swiftly to widen the tax base and include

products so that multiple taxes that automotive fuels bear get eliminated, making tax set-offs available on inputs across the chain. Ditto for electricity duty, real estate as well as online gaming.

Deploying artificial intelligence (AI) for risk-based assessment makes sense to plug tax evasion. Audit trails must be pursued vigorously. Structural reform, rather than chip-chops in tax rates, will boost revenues significantly.


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