GST Council Now a ‘Rate-Cutting Panel,’ Warns Ex-CEA Arvind Subramanian

Former Chief Economic Advisor (CEA), Arvind Subramanian, has raised concerns about the evolving role of the Goods and Services Tax (GST) Council in India. According to Subramanian, the GST Council has increasingly become a “rate-cutting panel,” a move he argues is undermining the original intent of the GST system. In this piece, we explore Subramanian’s views, the implications of this shift, and what it means for India’s economy.

Background: The GST was introduced in India on July 1, 2017, as a revolutionary tax reform aimed at creating a unified market, simplifying tax compliance, and boosting economic growth. The GST Council, which is a constitutional body consisting of both central and state finance ministers, is responsible for determining the GST rates on various goods and services. Since its inception, the GST Council has been tasked with balancing the interests of both the central government and states, ensuring equitable tax collection while promoting economic efficiency.

Initially, the GST aimed to broaden the tax base and streamline the taxation system, eliminating the cascading effect of taxes under the old system of excise, VAT, and service tax. The focus was on simplifying the tax structure and improving the ease of doing business. However, Subramanian’s critique suggests that the Council has shifted its focus towards reducing tax rates rather than enhancing the tax system’s broader objectives.

The Shift Towards Rate Cuts

Subramanian’s comments focus on the growing trend of reducing tax rates on various goods and services, especially in the aftermath of the pandemic and as part of the government’s efforts to stimulate economic activity. The GST Council has made several rate reductions since 2017, a move that has been welcomed by businesses and consumers but has raised concerns among economists like Subramanian.

Subramanian points out that while rate cuts may provide short-term relief to consumers and businesses, they could potentially undermine the GST system’s long-term sustainability. By reducing rates too frequently, the government may be depriving itself of essential revenue that is needed for public spending and investment in key sectors such as infrastructure, health, and education.

Fiscal Impact and Revenue Shortfall

The central issue, according to Subramanian, lies in the fiscal impact of these rate cuts. India’s economy, already grappling with challenges such as low tax compliance and rising fiscal deficits, cannot afford to cut GST rates indiscriminately. The cuts, though politically popular, could result in a significant shortfall in the revenue collection necessary to meet fiscal targets.

In particular, Subramanian cautions that rate reductions may make it more difficult for the government to finance essential welfare programs, especially for the marginalized sections of society. While lower tax rates may seem beneficial for consumers, the long-term consequences could lead to a reduction in the resources available for social welfare, health, and education.

The Long-Term Consequences of Excessive Rate Cuts

Subramanian’s critique hinges on the idea that rate cuts are not the solution to the structural issues facing the Indian economy. While tax rates may seem high in some sectors, the focus should instead be on improving compliance, simplifying tax administration, and broadening the tax base. Reducing the tax burden without addressing the underlying inefficiencies in the tax system could ultimately harm India’s fiscal health.

Moreover, Subramanian warns that continuous rate cuts may undermine the credibility of the GST as a stable, long-term revenue source. Frequent changes in tax rates create uncertainty among businesses and may deter long-term investments. Businesses prefer stability and predictability in tax regimes, and constant adjustments to the GST structure could reduce confidence in the system.

Reverting to the Original Intent of GST

According to Subramanian, the GST system should not be used as a political tool to curry favor with the electorate. Instead, it should be an instrument to create a more efficient, transparent, and equitable tax system that benefits both the government and the people. The priority, he argues, should be on simplifying compliance procedures, improving the quality of tax administration, and expanding the tax base, rather than focusing solely on reducing rates.

The GST Council, he suggests, should focus on ensuring that the tax system remains fair and efficient. It should aim to address issues such as tax evasion, complexity in compliance, and the challenge of broadening the taxpayer base. Rate reductions, while they may have a short-term positive impact, should not become the primary focus of the Council’s agenda.

Moving Forward: A Call for Reform

Subramanian’s comments are not just a criticism but also a call for reform. He advocates for a more balanced approach to taxation, where the focus shifts from short-term political gains to long-term fiscal sustainability. He suggests that the GST Council should work towards a more coherent and stable tax structure, one that balances the needs of businesses, consumers, and the government.

In addition, Subramanian emphasizes the importance of addressing the underlying structural challenges in the economy, such as low tax compliance rates, informal sector activities, and the complex multi-rate structure. The government should work on increasing the efficiency of the GST system, rather than just focusing on rate cuts.

Conclusion

Arvind Subramanian’s critique of the GST Council turning into a “rate-cutting panel” highlights the tension between short-term political objectives and long-term fiscal sustainability. While reducing tax rates can provide temporary relief to businesses and consumers, it may jeopardize the government’s ability to fund essential services and infrastructure projects. Moving forward, it will be important for the GST Council to find a balance between fostering growth, ensuring equity, and maintaining fiscal discipline. The focus should shift from the political expediency of rate cuts to a more robust and transparent tax system that can support India’s economic growth and development over the long run.