Retrospective Taxation and GST - A Call for Reforms 2.0

Retrospective Taxation and GST - A Call for Reforms 2.0

Context: January, named after the Roman god Janus, symbolizes looking back at past lessons while planning for the future. Reflecting on 2024, India’s fiscal policies show a worrying return to outdated practices.

Retrospective Taxation - A Harmful Habit:

• GST Council’s decision: The 55th GST Council’s recommendation of retrospective tax amendments undermines judicial decisions, including Supreme Court verdicts.
• Impact on businesses: Retroactive nullification of court rulings damages India's reputation for the rule of law and discourages investment.
• Historical lessons: Similar actions, like the Vodafone case, led to India paying international awards, highlighting the need to avoid such policies.

The GST System - Challenges and Flaws:

• Revenue maximization over growth: The GST Council’s narrow focus on revenue collection leads to:
• High tax rates suppressing demand and growth.
• Complex exemptions, circulars, and show-cause notices.
• A lack of a fair appellate system.
• Input tax credit issues: Denial of input tax credit for essential sectors (e.g., real estate) creates economic inefficiencies.
• High tax burden: Excessive GST on lease rentals, affordable housing, and infrastructure hampers economic progress.

Economic Impacts of High Tax Rates:

• Consumption and competition:
  • High taxes reduce consumption, while lower rates could boost demand and tax revenues.
  • Simplified and competitive tax rates could help Indian businesses compete with Chinese imports.
• Sectoral challenges:
  • Real estate: Multiple taxes increase costs, contradicting affordable housing goals.
  • Cement: A uniform 18% GST could lower infrastructure costs.
  • Hospitality: Standardizing GST rates for hotels and restaurants can drive growth.
• The Slide back to old practices:
  • India’s tax system (1950-1990) prioritized revenue over growth, leading to economic stagnation.
  • Signs of a return to these practices are evident in:
  • Rising imports from China ($70 billion in 2018-19 to $100 billion in 2023-24).
  • Declining manufacturing sector contribution to GDP (<15%).
  • Continued depreciation of the rupee.

A New Policy Framework for Growth:

• Reforms 2.0: After 1991, it’s time for the Reforms 2.0.
• India needs to prioritize growth maximization, with taxes as a byproduct of growth.
• Introduce empirical studies to evaluate tax impacts on consumption.
• Simplify tax structures to encourage investment and growth.
• Transition to a long-term fiscal policy (2025-2030) focused on a 9-10% annual growth rate.
• Urgency for change: The current system risks a downward spiral of low growth and high taxes, requiring immediate reforms.

Conclusion - A New Year, A New Vision:

• Just as individuals resolve to improve themselves, nations must do the same.
• The need of the hour is a bold fiscal overhaul, embracing growth-focused policies and respecting the rule of law.
• Without reform, India risks stifling its potential; with it, a brighter economic future is within reach.
• The GST Council and, indeed, the Central Board of Direct Taxes (CBDT) must now adopt a new policy framework that focuses on growth maximisation.

Q1. What is the retrospective effect of taxation?

Ans. Retrospective tax means giving effect to the amendment in the present law before the date on which the changes were brought in. It taxes a transaction that took place prior to the law being framed.

Q2. What are the main defects of the Indian taxation system?

Ans. A lack of transparency and corruption undermine the effectiveness of tax collection. India heavily relies on indirect taxes, such as the Goods and Services Tax (GST), which places a burden on the end consumer.

Q3. What is India's Goods and Services Tax (GST)?

Ans. GST is an indirect tax imposed on the supply of goods and services. It is a multi-stage, destination-oriented tax imposed on every value addition, replacing multiple indirect taxes, including VAT, excise duty, service taxes, etc.

Q4. What is the function of the GST Council?

Ans. The GST Council serves as the principal committee responsible for amending, reconciling, or enacting any laws or regulations pertaining to the GST in India. Chaired by the Union Finance Minister of India, the council is supported by finance ministers from all Indian states.

Q5. What are the reforms needed in India's GST system?

Ans. India's GST regime could benefit from reforms in the following areas: Rationalizing GST rates, improving dispute resolution, removing restrictions on input tax credit (ITC), introducing faceless assessments, simplifying tax laws, etc.

Source: IE