The Economic Advisory Council to the Prime Minister (EAC-PM) Chairman, Bibek Debroy, has expressed concerns over the revenue implications of India’s Goods and Services Tax (GST) system, while also acknowledging its role in simplification.
Debroy made these remarks during an event organized by the Calcutta Chamber of Commerce. He highlighted that the original intention of GST was to maintain revenue neutrality through a single rate. However, the current average GST rate of 11.4 percent falls short of the originally calculated revenue-neutral rate of at least 17 percent, resulting in a loss of government revenue.
Debroy emphasized that while there is a desire among the public and GST Council members to reduce the high 28 percent tax rate, there is reluctance to alter the lower tax rates of 0 percent and 3 percent. This stance, according to him, impedes the goal of achieving a simplified GST structure.
The economist also noted instances of “abuse” of GST provisions without providing specific details. On the topic of direct taxes, he proposed that comprehensive tax reforms should ultimately lead to the elimination of all exemptions. According to Debroy, exemptions complicate the tax system, increase compliance costs, and contribute to legal disputes.
Regarding government spending and revenue, Debroy highlighted the disparity between citizens’ tax payments and their expectations from the government. He stated that citizens pay around 15 percent of GDP as taxes but have expectations that correspond to 23 percent of GDP. This disconnect underscores the need for either higher tax payments or adjusted expectations in terms of government services and facilities.
Debroy also addressed India’s demographic challenges, particularly the slowing population growth rate and the impending burden of an aging population after 2035. He suggested that balanced population demographics could aid in managing social security needs for the elderly. The slowdown in population growth is projected to present significant challenges for India, similar to what China is facing, where an aging population is outpacing economic growth.
On the issue of employment, Debroy expressed concerns about the quality and productivity of jobs being created in India. While the country needs to generate approximately 8 million jobs annually, the current rate stands at around 5 million. Furthermore, he pointed out the mismatch between skills and education, highlighting the necessity to address these gaps for sustainable economic growth.