Time to simplify GST with fewer rates to curb misclassification, boost compliance: Govinda Rao

India’s GST system is among the few globally with multiple tax rates

Simplifying India’s Goods and Services Tax (GST) system by reducing the number of tax rates, expanding its base, and leveraging digital tools could be a transformative step in addressing inefficiencies, economist and former member of the 14th Finance Commission M Govinda Rao has said.

Rao also underscored the critical need for fiscal reforms to bolster the nation’s tax-to-GDP ratio and support its developmental ambitions.

“India’s tax-to-GDP ratio is 16.5 percent, which is significantly lower than the 19-20 percent seen in developed nations. This needs to increase substantially. Simplifying the GST with fewer rates, backed by digitisation and AI, can play a pivotal role,” Rao said, emphasising that GST reforms are vital to addressing tax evasion and litigation issues. He was speaking at the Skoch Summit on ‘New Dimension in Inclusive Growth’.

India’s GST system is among the few globally with multiple tax rates, leading to complexities, misclassification, and potential dishonesty, Rao pointed out.

“Globally, GST is considered a money machine. The best practice is a broad-based, low-rate, simple, and transparent GST system. While political constraints may prevent a single rate, reducing the number of rates would bring clarity and efficiency,” he suggested.

Highlighting specific disparities, Rao noted that labour-intensive items, like cement, attract a GST of 28 percent, while steel is taxed at 18 percent. Similarly, catering is taxed at 18 percent, but non-star hotel restaurants face a 5 percent tax. “If the restaurant is providing catering service, it leads to scope for misclassification. These inconsistencies result in misclassification, litigation, and dishonesty,” he explained.

Citing international examples, Rao noted that most European countries operate with no more than two GST rates, which reduces confusion and promotes compliance. “India should adopt similar practices, along with ongoing corrections to address interpretation issues across states,” he recommended.

He also suggested bringing petroleum products under GST to ensure uniform taxation and reduce cascading effects. “A simpler tax structure with a low rate increases the probability of detecting evasion and encourages compliance,” Rao added.

Broadening GST Base

To enhance tax compliance and generate actionable intelligence, Rao advocated for expanding the GST base by lowering thresholds. “According to Karnataka data, 94 percent of GST taxpayers have turnovers of less than Rs 50 lakh. A lower threshold would provide extensive data, helping uncover linkages to prevent tax evasion,” he said.

Companies with a yearly turnover of more than Rs 40 lakh (for goods) and Rs 20 lakh (for services) are required to register for GST and pay taxes on their taxable goods and services.
“Digitisation and AI can drive compliance, but the government must simplify the GST structure, broaden its base, and redirect resources towards skill development and infrastructure to position India as a global leader in economic growth,” he said.

Fiscal Challenges
Rao warned of limited fiscal space, with the combined fiscal deficit of the Centre and states currently at 7.5 percent. He called for prioritising public spending on capital expenditure, infrastructure, and skill development over subsidies. “India must create fiscal space to sustain economic growth. Developed nations have a per capita income of $14,205, while India’s is $2,600. To bridge this gap, India needs to grow at 9 percent annually for the next 23 years—a highly aspirational but necessary goal,” he stated.

Rao identified several areas for reform to drive inclusive growth including improving agriculture productivity. With 43 percent of India’s workforce engaged in agriculture, Rao stressed the importance of enhancing productivity and creating non-agricultural jobs.