India must move towards a single-rate GST: Kelkar

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The shortfall in goods and Services Tax (GST) revenue collection is an investment for progress as the long-term benefits of tax reforms are immense, according to the civil servant who advised the government to bring in the GST back in 2004. Vijay Kelkar, former finance secretary and chairman of the 13th finance commission, said in an interview last week that India should progress toward a single, low-rate GST which will help in making the domestic industry globally competitive.

“As long as an ideal GST is rolled out, I am not too worried about the revenue shortfall in the initial years. One should treat it as an investment that is required for obtaining fundamental progress. The long-term benefits of GST is so large. The most important thing to focus on is a low, single-rate, and simplicity,” said Kelkar, co-author of the book In Service of the Republic: The Art and Science of Economic Policy. India is yet to realise the full potential of the indirect tax reform as petroleum, electricity and land are kept out of GST and the government had to suspend several features of the new indirect tax to make compliance easy for the vast majority of small businesses and traders. With GST revenue collections remaining below target, central and state government officials are now reviewing the GST structure for a potential revamp.

Kelkar said that in emerging economies, the way tax is administered on the ground, in effect, is the real tax policy. “If the administration is not capable, keep the policy simple. A single-rate GST, with a low rate, where the administration has low powers of investigation and punishment, is the way to go,” he said. Kelkar and his co-author, Ajay Shah, a professor at policy think tank National Institute of Public Finance and Policy (NIPFP), argued in their book that a single, low rate of GST would be administratively simple and would offer the lowest incentives for tax evasion. The authors also suggested in the book that a single 10% rate applied on 70% of the economy yields 7% of GDP as tax revenue. “Even if we actually obtain a part of this, we are broadly okay. At this low rate, it would have been possible to avoid all exclusions. Petroleum products could have gone in, real estate could have gone in,” the authors said in the book.

The authors also explore in their book why states fail and what ails policy making in India. They argue there is more to be done in terms of decentralization. Kelkar and Shah also propose that urban local bodies should be given more resources and freedom for their functions as decentralization would yield rich dividends in development. Shah said, in the interview, that the state should foster freedom, innovation and creativity of private persons rather than having centralized planning and a socialist vision under which the government tries to engineer society, and tells everyone what they should do.

“We need to harness the energy of private people. The only path to prosperity and freedom is where the hero of the story is the individual and not the state. We should create conditions for the flowering of individuals. The federal foundations of the Constitution of India put us on the right track, towards a world where each village and each city is the master of its own destiny, and not looking up waiting for guidance or orders or single national systems,” said Shah. “I think we need to do much more on decentralization and strengthening of urban local bodies. Today large cities are governed by the state capitals, not by city mayors. This needs to change. Local government will work better than an official or a politician who is far away. Give them resources and make them accountable,” said Kelkar.

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