Fifteenth Finance Commission Chairman N K Singh said on Thursday that the goods and services tax (GST) was not a perfect tax system and it required changes, including greater rate rationalisation. Singh, who submitted the commission’s report to the government, said any finance commission’s job was a balancing act to reconcile the different objectives.
He said no state government was happy with the Fourteenth Finance Commission’s recommendations on devolution, even as it raised it to 42 percent, from the earlier 32 percent. The Centre was not happy either, he recalled. On GST, he said, “Yes, it is a path-breaking reform… but it is not perfect. That is the real issue. The implementation of GST is an ongoing process,” he said at the eAdda organised by The Indian Express.
He said three changes were necessary for making GST effective: greater rate rationalisation, getting rid of exemptions, and improving the quality of technology and invoice matching. “We need a regime which is genuinely revenue neutral. When I left the finance ministry, 15-16 percent was what we were looking at – a merit rate and a demerit rate,” he said.
Having interacted with all states, Singh believed that federalism as a concept was philosophically far more broad-based than just being fiduciary. “There needs to be much greater partnership in national priorities. Cooperation needs to be extended. Pandemic is one such example,” he observed.
He said a different mechanism was needed to continue the dialogue between the Centre and states. “Perhaps the NITI Aayog can be restructured. Or a revamped Centre-states council or a different structure altogether for the dialogue between the Centre and states to continue,” he advised. Singh said the nominal gross domestic product (GDP) growth would be negative. “We don’t know what the third and fourth quarters would be like, but a sharper contraction would mean greater rebound next year,” he said.
If the current ongoing reforms are implemented, Singh said he saw the economy getting back to a higher trajectory in the later part of the post-pandemic period. “Combined fiscal deficit of the Centre and states today is perhaps 10 per cent of GDP. That is the fiscal stimulus available in the system,” he said. To a query on the savings rate and investments going down in the country, he said, “For growth rates to go up to 8 per cent, savings, investment, and incremental capital output ratio need to go up.” He said corporate tax rates in the country are internationally competitive and the income-tax rates rationalised. When asked if there was undue harshness in the tax administration, Singh said, “The tax ethos needs to be based on much greater trust and friendliness.”
Former chief economic advisor Shankar Acharya said some of the government’s actions in trade policy have been reversing the course of growth in the past two-three years. “In the past two to three years, some of our actions, especially in trade policy, seem to be reversing, not engaging with Asia – tariffs, Regional Comprehensive Economic Partnership, etc. To me, this is disquieting,” he said. Singh said countries which have followed the anti-trade policies have not been able to achieve growth. “But the world has increasingly grown protectionist in the past few years,” he said. Singh said there was no doubt that achieving high economic growth required engaging with the most dynamic parts of the world, especially Southeast and East Asia. “Trade is the engine of growth,” he added.