Our tax system retards growth. It’s time for an overhaul

In 2014, the precocious Arun Jaitley termed retrospective taxation “tax terrorism”. Prime Minister Narendra Modi has besides condemned this signifier connected much than 1 occasion. But the 55th GST Council has present recommended a retrospective taxation amendment to nullify a caller Supreme Court judgement that would person resulted successful granting input taxation recognition to warehouses and infrastructure projects. The quality of the dispute, the judgement and the interaction of the projected retrospective amendment from July 1, 2017 merit a abstracted article. What is retrograde is the connection being sent to the concern world: We volition archetypal contradict you relief, if you inactive combat america for respective years and up to the Supreme Court and succeed, we volition simply trim the judgement to a nullity by a retrospective amendment. If we triumph successful court, fine; if we lose, we volition inactive triumph by a retrospective amendment.

Sadly, the GST section whitethorn win successful recovering a fewer further crores of GST by the amendment. But the collateral harm to India’s estimation arsenic an concern determination is staggering. Apart from disrespecting your ain Supreme Court, the connection conveyed is the lack of the regularisation of law.

The Vodafone verdict was a aureate accidental to showcase India arsenic a uncommon processing federation wherever tribunal verdicts are respected and the regularisation of instrumentality prevails. The ill-advised retrospective amendment to nullify that judgement resulted successful an planetary grant of Rs 8000 crore, which India had to pay. It is clip to person a caller year’s resolution: No much retrospective amendments.

The fatal flaw successful the functioning of the GST Council is the single-minded absorption connected gross maximisation. The section repeatedly has quality items published that lone study taxation evasion — often with exaggerated claims. No effort is made to rationalise rates, chopped down analyzable notifications and circulars, cheque arbitrary and exaggerated demands done show-cause notices and make a just and impartial appellate system.

It is morally unfair and economically disastrous to levy GST connected assorted goods and services but contradict them input taxation credit. In particular, the GST Council indispensable earnestly rethink the levying of GST connected lease rentals, connected duty of leasehold rights, and associated improvement rights arsenic these are neither goods nor services. This volition beryllium a immense boost to the existent property assemblage and, indeed, the system if determination is nary GST connected immoderate enactment different than works’ contracts. It is paradoxical to talk of affordable lodging but marque it unaffordable by aggregate taxes.

It is indispensable to person cautious empirical studies of the interaction of precocious taxes connected consumption. Will lowering of taxes stimulate demand, yet resulting successful larger taxation collection? Will lowering of taxes alteration Indian companies to vie with akin Chinese products? For example, wherefore cannot determination beryllium a azygous complaint of 12 per cent connected each hotels and restaurants alternatively of aggregate rates based connected country tariffs and different parameters? Will a maximum complaint of 18 per cent connected cement trim the outgo of affordable lodging and infrastructure projects?

High rates of tax, a analyzable strategy of exemption and concessions, and an overarching absorption connected gross postulation were the hallmarks of our nonstop and indirect taxation strategy from 1950 to 1990. This socialist mindset crippled the Indian system and led to the 1991 liberalisation that gave a boost to the economy. Looking backmost implicit the past fewer years, determination are respective signs that we are erstwhile again getting backmost to the aged retrograde strategy that is simply a paradise for lawyers, chartered accountants and gross officers but a nightmare for businesses.

The adverse consequences are clear: Imports from China person accrued from $70 cardinal successful 2018-19 to $100 cardinal successful 2023-24, the stock of manufacturing has slipped to beneath 15 per cent of our GDP, and the further sliding of the rupee is present taken for granted.

The contiguous strategy retards maturation and discourages caller investment. This leads to little gross collection, which is past sought to beryllium remedied by higher taxes, which, successful turn, leads to little growth. The dangers of specified a downward spiral are existent and necessitate urgent attention.

The GST Council and, indeed, the Central Board of Direct Taxes indispensable present follow a caller argumentation model that focuses connected maturation maximisation. Taxes indispensable beryllium a byproduct of maturation and not an extremity successful itself. After 1991, it is clip to enactment successful spot Reforms 2.0, which volition alteration a 9-10 per cent yearly maturation rate. This maturation complaint is attainable, provided we person the courageousness to overhaul our taxation system. It is so clip for a caller semipermanent fiscal argumentation for 2025-2030. As is existent for an individual, truthful it is for a nation: There is nary rebirth without death.

The writer is elder advocate, Supreme Court of India.