The Centre has reportedly favoured a pause in further rate cuts on the goods and services tax (GST) due to the revenue shortfall, estimated at over Rs 40,000 crore in the first quarter of this fiscal. This is hasty, on two counts. The slew of changes that have periodically been brought about show that the tax system has stabilised neither in terms of the rate structure nor in categorisation of goods and services. There are too many rates now and some rates are still way too high. Rates must be lowered, converged to three to bring down classification disputes, and boost collections. The final GST structure should become stable to achieve a sustained increase in collections. Two, GST-induced revenue changes occur in direct tax collections above the trend, not just in GST collections per se.

The levy creates multiple audit trails in the income and production chain that have the potential to tap untaxed income. Revenues from Central GST, IGST, the proceeds from personal and corporate income tax, and customs duties are a part of the divisible pool of taxes. States would be entitled to a 42% share in direct tax collections above the trend. This should be factored in, and only the balance need be compensated by the Centre for shortfall of state-level revenue, from the proceeds of sin cesses.

States agreeing to run pilots to refund the tax paid through a cashback offer — up to 20% of the taxes with a cap of Rs. 100 — to those using RuPay cards or the BHIM app is fine. However, a better way is to facilitate cashless transactions is by cutting the charges that banks impose on customers and merchants for transactions. Competition would lower the cost and the RBI’s savings on handling cash and the Centre’s gains from greater transparency can fund what remains, at least in part. #casansaar (source: The Economic Times)