Overhaul GST, Raise Revenue

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 Overhaul GST, Raise Revenue

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• Don't waste a crisis: The fight over the GST compensation cess between the Centre and States has bruised the trust factor, and some are questioning the adoption of GST itself. There is an opportunity now to improve the whole system.
• India's macroeconomic situation: The fiscal deficit will rise much higher than budgeted, and that is unavoidable and desirable. And to reduce it in near-term, higher tax collections is the right approach (and not expenditure reduction). To do that, rationalisation of tax rates, data analytics and better tax administration are recommened (not higher tax rates which will reduce collections!). 
• The numbers: Normally, centre and states together collect upto 17% of GDP as taxes. Another 2% comes via non-tax routes like PSU dividends, stamp duty, spectrum fees, etc. Rest is all borrowings, and then expenditures are funded. Combined fiscal deficit in a normal year (Centre + States) is upto 7%.
• A better GST: Of the 17%, nearly 12% are indirect taxes of which import duties are 2%. So GST is rougly 10% of GDP. So higher GST rates of 18% or 28% also get averaged out at 10% of GDP. Since agriculture is outside the tax net, so 87% of total GDP is yielding tax revenue worth 10% of GDP. Of the taxable part of GDP, indirect taxes are 11.5%. That means that if there were just one rate of GST at 11.5%, we'd get the same tax collection (outside of agri GDP). A rate of 15% will take into account losses due to small players being out of tax net. 
• EU example: The EU has 15% as minimum VAT, and then lower rates for food, newspapers etc. India can levy one rate of 16% (Arvind Subramanian committee) and then some lower rates. 
• Basic benefit of GST: A GST system creates a full audit trail of the buyer-supplier value chain, with transparency on who is spending and earning what. (supplier supply goods, pay GST and claim input tax credit - so full information on buyers is known). With careful planning, the taxman can actually check each unit of value addition in the economy. Sadly, Indian GST has many exemptions like fuel and electricity, thereby breaking the audit trail. Change all that, and end all exemptions. Only a few may be zero-rated (so they pay zero tax on paper, and claim their input tax credit).
• The economic equation: Value added in a production process is the sum of gross profits and the wage bill. So the taxman can also see the incomes that must be liable for direct taxes. The GST paid by a firm thus is a good indicator of the wage bill also. Given the minimum wage rates, Trade Unions can estimate the number of employees etc. So GST is a tool for formalisation like none other!
• To stop GST evasion: Focus on basic raw materials, which are made by large corporations who have to report higher (= real) incomes as their stock market values depend on it. If these large firms are asked to list down each of their customers, and then those are asked to list down their customers, no one can escape taxation.
• The last step: If the GST Network (GSTN) can make a system of raising invoice where any invoice in India is also automatically registered in the GSTN then full analytics will be instantly available. It is not an impossible dream. 

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