July 25, 2016

Cap on GST Rate Means Limiting Government’s Powers to Levy Inordinately High Indirect Taxes

By Praveen Chakravarty, Ajit Ranade

In this ET blog post, Praveen Chakravarty, Visiting Senior Fellow at IDFC Institute, and Ajit Ranade articulate the great Indian tax paradox: very few pay taxes but also everyone, rich or poor, pays high taxes. This, they posit is because of India’s lopsided tax structure, where only a small minority pays income tax and to compensation the state levies high indirect taxes. 


"In 1991, Raja Chelliah was appointed to chair a committee on tax reforms. India’s overall tax-to-GDP ratio was 16% then. About 85% of these tax revenues of the Centre and states combined came from indirect taxes and 15% from direct taxes. Chelliah submitted his report in 1993 that urged the Indian state to collect more revenue through direct taxes. A quarter century on, India’s indirect-to-direct tax ratio is 65:35, down from the 85:15 ratio in 1991, but still a far cry from the average 35:65 ratio of most other countries... India has the dubious distinction of having one of the lowest direct tax-to-GDP ratios in the world. The GST legislation presents a golden opportunity to fulfil Chelliah’s dreams... One tax on all goods and services across the entire nation with no unfettered powers to raise tax rates seems like the distant Promised Land, far from the current maze of a regressive tax structure."


Read the full article here

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