Reforms 2.0: Reshaping India’s Tax Policies for Sustainable Growth

Context : India’s fiscal policies in 2024 highlight a concerning trend: a return to outdated practices that prioritize revenue generation at the cost of economic growth. From retrospective taxation to inefficiencies in the GST system, these issues undermine the country’s ability to foster investment, competitiveness, and development.

Understanding the challenges and adopting growth-oriented reforms is critical to ensuring sustainable progress.

Retrospective Taxation: A Counterproductive Approach

One of the most harmful practices resurfacing is retrospective taxation, which damages India’s credibility and economic stability.

Key Issues:

• 55th GST Council’s Decision:

  • The Council recommended retrospective amendments to tax laws, overriding judicial verdicts, including those by the Supreme Court.
  • Impact: Such retroactive changes undermine the rule of law and deter both domestic and foreign investments.

• Historical Lessons Ignored:

  • The Vodafone tax dispute is a prime example of the damage caused by retrospective taxation, forcing India to pay Investor-State Dispute Settlement (ISDS) awards.
  • This incident highlighted the financial and reputational harm of unpredictable tax policies, yet similar mistakes are being repeated.

The GST System: Flaws and Challenges

The Goods and Services Tax (GST) was introduced to simplify India’s tax regime, but its implementation has revealed significant inefficiencies.

Key Challenges:

1. Revenue Focus Over Growth:

   • High Tax Rates: These suppress consumption and economic activity, slowing overall growth.
   • Complex Compliance: Multiple exemptions, frequent circulars, and confusing notices create unnecessary hurdles for businesses.
   • Lack of a Fair Appellate System: Taxpayers often lack a proper mechanism to resolve disputes.

2. Input Tax Credit (ITC) Issues:

   • Denial of ITC for critical sectors like real estate increases costs and reduces efficiency.

3. High Tax Burden on Key Sectors:

   • Lease Rentals: High GST rates make affordable housing more expensive.
   • Infrastructure: Excessive GST on inputs like cement raises development costs.
   • Hospitality: Complex GST rates for hotels and restaurants hinder growth in the tourism sector.

Economic Impacts of High Tax Rates

India’s high-tax regime affects consumption, competitiveness, and sectoral growth.

Key Impacts:

1. Reduced Consumption:

   • Elevated taxes discourage spending, weakening demand and economic activity.

2. Loss of Competitiveness:

   • Simplified and competitive tax rates could help Indian businesses compete more effectively, especially against Chinese imports.

3. Sectoral Challenges:

   • Real Estate: High taxes inflate costs, contradicting the government’s affordable housing objectives.
   • Cement Industry: A uniform 18% GST could lower infrastructure costs and drive development.
   • Hospitality: Rationalized GST rates for hotels and restaurants would encourage growth and employment in the sector.

Signs of Regression to Old Practices

India’s pre-1991 tax system prioritized revenue over growth, leading to stagnation. Unfortunately, signs of regression to these outdated practices are now evident.

Concerning Trends:

• Rising Imports from China:

  • Imports have increased from $70 billion in 2018-19 to $100 billion in 2023-24, highlighting dependency on foreign goods.

• Declining Manufacturing Contribution:

  • Manufacturing’s share in GDP remains below 15%, far short of the Make in India targets.

• Rupee Depreciation:

  • The continued weakening of the rupee reflects underlying economic inefficiencies.

A New Policy Framework for Growth

To break free from these challenges, India needs a transformative shift in fiscal policies. The focus must move from revenue maximization to growth maximization.

Key Recommendations:

1. Reforms 2.0:

   • After the success of the 1991 liberalization, a new wave of reforms is necessary to address modern economic challenges.

2. Growth-Centric Policies:

   • Economic growth should be prioritized, with tax revenues following as a byproduct of expansion.

3. Simplify Tax Structures:

   • Streamlined and transparent tax systems would encourage compliance and attract investment.

4. Empirical Evaluation of Tax Policies:

   • Conduct studies to understand how tax rates impact consumption, competitiveness, and investment.

5. Long-Term Fiscal Vision:

   • Develop a roadmap for 2025–2030, targeting an annual growth rate of 9–10%.

Conclusion: The Urgency for Fiscal Reform

India’s current fiscal policies risk stifling economic growth and deterring investment. Without immediate reform, the country faces a cycle of low growth and high taxation, jeopardizing its global economic aspirations.

However, bold reforms, including a simplified tax system and growth-oriented policies, can unlock India’s immense potential. The GST Council and Central Board of Direct Taxes (CBDT) must lead this transformation by adopting a framework that prioritizes efficiency, fairness, and long-term growth.

India’s economic future depends on the choices made today—only with decisive action can the nation secure sustainable progress and global leadership in the years to come.