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Our tax system retards growth. It’s time for an overhaul
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Context
The 55th GST Council's recommendations reflect a worrying return to problematic practices, including retrospective tax amendments. The proposed retrospective change to nullify a Supreme Court ruling raises concerns over legal instability, affecting India's investment climate.
Retrogressive Tax Policies and Governance Failures
- Retrospective Tax Amendments: The GST Council’s proposed retrospective tax amendment to counter a Supreme Court judgment undermines legal stability and signals to investors that judicial decisions can be overridden at will.
- Impact on Business Confidence: The retrospective amendments reduce investor confidence, as seen in the Vodafone case, where India had to pay an Rs 8,000 crore arbitration award, highlighting the damage to legal integrity and predictability.
- High Tax Rates and Economic Consequences: Excessive taxes suppress demand, encourage tax evasion, and foster the black economy, with no effort to simplify rates or remove arbitrary decisions, ultimately harming businesses.
Flawed Taxation System and Its Negative Impact
- Focus on Revenue Maximization Over Growth: The emphasis on revenue collection over growth results in exaggerated reports of tax evasion and a failure to simplify the system or address unfair tax policies.
- Inequities in GST Implementation: GST on lease rentals and joint development rights, which are not goods or services, increases costs in real estate and housing, making essential sectors less affordable.
- Empirical Studies Needed on Tax Impact: Empirical research is needed to assess the effect of high taxes on consumption. Lowering tax rates, such as a single 12% GST on hotels, could boost demand and India’s global competitiveness.
Path to Growth-Oriented Tax Reforms
- Reforms to Stimulate Growth: India must shift from revenue maximization to growth-oriented policies, making taxes a result of economic expansion, as part of a broader "Reforms 2.0" agenda.
- Structural Challenges and Opportunities: The current tax system has led to lower manufacturing and rising imports, particularly from China. Urgent reforms are needed to foster domestic production and reduce reliance on foreign goods.
- Focus on Long-Term Fiscal Policy: India needs a long-term fiscal policy (2025-2030) focused on encouraging investment and fostering sustainable growth, moving beyond short-term tax maximization to growth and job creation.
Practice Question
Q. Critically evaluate the shift towards revenue-maximization in India’s current tax system and its implications for long-term economic growth. How can India adopt growth-oriented tax reforms?
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