27 January 2025 : Indian Express Editorial Analysis

1. Let’s overhaul the tax system

(Source – Indian Express, Section – The Ideas Page – Page No. – 09)

Analysis of the news:

What is Retrospective Taxation?

• Retrospective tax is a tax charged for transactions in the past.
• It simply means imposing an additional tax charge from a specified date in the past.
• Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods, or services from a time before the date on which the law is passed.

Retrospective Taxation: A Step Backward

• Looking back at 2024, the decisions made during the 55th GST Council meeting reveal a troubling regression to old, counterproductive practices.
• The Council’s recommendation for a retrospective amendment to nullify a Supreme Court judgment—granting input tax credit to warehouses and infrastructure projects—undermines judicial authority and damages India’s business environment.
• Retrospective taxation not only disrespects the rule of law but also tarnishes India’s reputation as a reliable investment destination.
• This practice echoes past missteps, such as the Vodafone case, which cost India Rs 8,000 crore in international arbitration.
• The long-term damage to investor confidence far outweighs the short-term fiscal gains.

Flawed Revenue Maximisation Focus

• The GST Council’s preoccupation with revenue maximisation reflects a myopic approach that stifles economic growth.
• By prioritising tax collection over rationalising tax structures, the Council perpetuates inefficiencies and complexity.
• High tax rates, coupled with denial of input tax credits, dampen demand, discourage investments, and inadvertently fuel tax evasion.
• Furthermore, the current system’s heavy reliance on complicated exemptions, arbitrary notices, and exaggerated claims creates an adversarial environment for businesses.
• A more balanced approach, focusing on fostering economic growth, could lead to sustainable revenue generation.

Tax Burden on Real Estate and Housing

• The real estate sector suffers disproportionately under the current GST regime.
• Levying GST on lease rentals, assignment of leasehold rights, and joint development rights creates significant financial strain on developers and homebuyers.
• These activities, which are neither goods nor services, should ideally be exempt from GST to stimulate the housing market and support affordable housing initiatives.
• Paradoxically, multiple layers of taxation undermine the government’s goal of providing affordable housing, making homes less accessible for the average citizen.

The Need for Empirical Taxation Studies

• A comprehensive analysis of the relationship between tax rates and economic behavior is urgently needed.
• For instance, would reducing GST rates on hotels, restaurants, and cement stimulate demand and improve tax compliance? Could a simplified, single-rate system enhance competitiveness against Chinese imports?
• Empirical studies could provide evidence-based guidance for policy decisions, ensuring a balance between revenue needs and economic growth.

Echoes of a Socialist Past

• India’s current tax system bears troubling similarities to the inefficient and growth-stifling framework of the pre-liberalisation era.
• High taxes, excessive regulation, and an overemphasis on revenue collection characterized the socialist mindset that led to the economic stagnation of the 1980s.
• The reemergence of these practices threatens to reverse the progress made since the 1991 liberalisation, which unleashed India’s economic potential.
• Rising imports from China, declining manufacturing output, and a weakening rupee are clear indicators of this regression.

The Path Forward: Growth-Oriented Reforms

• To break the cycle of low growth and high taxation, India needs a new fiscal vision focused on growth maximisation.
• Taxes should be the byproduct of a thriving economy, not its primary objective.
• A second wave of reforms—“Reforms 2.0”—could enable India to achieve a sustainable annual growth rate of 9-10%.
• Simplifying the tax regime, respecting judicial verdicts, and fostering a business-friendly environment are critical steps toward this goal.
• As with individuals, nations too must embrace transformation to achieve rebirth.
• For India, the time to implement a bold and forward-looking fiscal policy for 2025-2030 is now.