GST will be more efficient with fewer exemptions, slabs: IMF’s Harald Finger

New Delhi: India is somewhat of an outlier with a complex goods and services tax structure, considering that around two-thirds of countries with a GST have only one or two non-zero rates, said Harald Finger, assistant director and mission chief for the India, Asia and Pacific department at the International Monetary Fund. Reducing the number of non-zero rates and cutting down on exemptions would make the indirect tax regime more efficient, he said.“A single GST rate applied on a broad base can improve compliance, facilitate enforcement, and reduce the risk of evasion (for example, from misclassifying the good or service to take advantage of a lower GST rate). Higher rates for demerit and luxury products can be maintained, ideally through an excise tax,” Finger told ET in an interview. The IMF in its Article IV report has made a case for rebuilding fiscal buffers through revenue augmentation.

Moreover, he noted, since the introduction of GST, changes to the rate structure have eroded the effective GST rate, and this erosion should be reversed.

He said vulnerable households can be compensated for any increase in their cost of living through increased transfers using the existing direct benefit transfer mechanism.

India rolled out GST in July 2017, subsuming several central and state indirect levies with a four-slab structure and special rates for some goods such as precious metals. Some sin goods also attract a cess.

The revenue-neutral rate for GST has fallen to about 11.6% because of several exemptions and reduction in tax rates from about 15.5% at the time of roll out. The GST Council, which is the apex decision-making body for the indirect tax, has tasked a group of ministers to look at rationalisation of the tax structure but there has been little headway on this.India can further strengthen its growth potential, even in the context of external headwinds, by advancing its structural reform agenda, Finger said.On getting states on board to undertake crucial reforms, he said, beyond fiscal tools, there is a need for coordination with states to advance structural reforms.

“The union government can play a convenor role in setting up a framework for discussion of reforms and providing technical assistance to states,” he said, citing examples of GST Council, the Conference of State Finance Secretaries convened by the Reserve Bank of India, and the ongoing development of state-level regulations of the new labour codes coordinated by Ministry of Labour.

On India’s financial system, he said, systemic financial risks are broadly contained, but further reform and vigilant supervision are needed to address remaining pockets of vulnerability.

“Concentrated exposures of non-bank financial companies (NBFCs) remain a vulnerability,” he said, adding that stress tests have shown that some banks, especially public sector banks, would benefit from building more capital to ensure they have the capacity to continue providing credit also in the face of adverse shocks.

“We recommend that exemptions for state-owned NBFCs from large exposure limits should be eliminated to level the playing field with their private sector counterparts,” he added.

On exchange rate, he said India has the necessary strength in economic fundamentals and policy frameworks to let the exchange rate move more. “For instance, exposure by Indian companies to foreign currency debt is low, the RBI’s flexible inflation targeting framework is well established, and the foreign exchange market is generally deep and liquid. With this, the exchange rate can be allowed to move more, and thereby play an important role as a shock absorber in the face of external shocks,” he added.