Base erosion: GST Council should revisit its approach to easing the compliance burden

Last week the GST Council took a couple of decisions which are expected to ease the burden of compliance on small businesses. The channels to ease the burden were linked to increasing the quantum of revenue which forms the threshold for a business to register for GST, and an increase in the ceiling for the composition scheme (an alternative tax to GST). By itself the aim to ease compliance burden is praiseworthy. However, the method chosen is open to question as it involves sacrificing other objectives.

The design of any tax policy involves trade-offs. Here the trade-off is between reducing compliance costs and limiting the size of the tax base by giving businesses more leeway to stay out of GST. One argument in favour of the Council’s decision is that small businesses contribute a miniscule proportion of overall tax revenue and, therefore, leaving them out is no great loss. This argument ignores an important objective of GST, which is to curb tax evasion by introducing an element of self-policing. The tax payer has an incentive to get suppliers to follow the law as that is a necessary condition to get tax credits. The key to fulfil this aim is to protect the tax base.

Compliance requirements need to be eased through process reforms. That’s the method used in income tax where the tax base is being widened by lowering the threshold to tax income. To illustrate, for about five years, the threshold at which income is taxed has remained Rs 2.5 lakh. During this period inflation has eroded the real value of Rs 2.5 lakh. Consequently, a new entrant into the income tax net is being taxed at a lower inflation-adjusted income. Why should there be different standards for individuals and businesses?