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Indias GST among most complex in world, and it is 0% tax rate that is hurting the idea
March, 17th 2018

The World Bank said that in addition to the number tax rates, the extent of exemptions and sales at a zero rate is a critical design parameter for a GST, compromising with the idea.

India’s GST regime with “higher tax rates and a large number of tax slabs” is one of the most complex among 115 nations with a similar tax system, the World Bank has said. However, what they also noted was that the zero percent tax rate in the new indirect tax regime is compromising the logic of the GST.

The World Bank said that in addition to the number tax rates, the extent of exemptions and sales at a zero rate is a critical design parameter for a GST. “While exemptions allow easing the tax burden on items with a high social
value, such as healthcare, they also reduce the tax base and compromise the logic of the GST,” the World Bank said.

Currently, India levies 0% GST tax rate on goods such as vegetables, food and services such as healthcare. The 0% tax rate reintroduce cascading where an exempted good or service is an input into another taxable good or service, create incentives for vertical integration to keep the exempt status; and raise compliance costs by making it necessary to allocate input taxes between exempt and non-exempt output when manufactured or traded together.

“The impact of declaring various goods as zero-rated does not only depend on the number of products exempt, but also on the revenue generated from each product,” the World Bank added.

In a comparison with 115 nations that also follow the GST system, the World Bank said that India’s highest tax rate of 28% is the second highest. With four non-zero GST rates — 5%, 12%, 18%, and 28% — India’s GST regime is among the nations with the highest number of different rates in the world.

The World Bank also pointed out that lack of clarity on discontinuation of local taxes was also one of the reasons for disruptions. Tamil Nadu reduced the Local Body Entertainment Tax from 10% to 8% but it is still imposed above the 28% GST making it the state with the highest tax on movies and a double taxation. Similarly, Maharashtra increased motor vehicles tax to compensate for losses due to the GST, the World Bank said.

After a 17-year-long deliberation, the Goods and Services Tax (GST) was implemented by the Narendra Modi government from July 1 last year. The idea of GST was ‘one nation, one tax’ but the government on multiple occasions said that in a diverse country like India one tax was not practical.

“While international experience suggests that the adjustment process can affect economic activity for multiple months, the benefits of the GST are likely to outweigh its costs in the long run,” the World Bank concluded.

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