The government should make structural changes to the goods and services tax (GST) system and increase compliance with increased revenues, given the need to compensate for the gap in state GST revenues, a parliamentary panel has advised the finance ministry.

Due to the pandemic, several states have reported lost revenue, affecting the collection of taxes on goods and services, a development that requires measures to improve compliance, said the Standing Parliamentary Committee on Financial Affairs chaired by Jayant Sinha, a former minister of State for Finance in a report released Tuesday.

"Given the prevailing economic scenario, the committee will urge the government to initiate all possible measures, both structural and implementation, to increase the collection of the GST, which has shown an upward trend in recent months," the panel said in its report.

The panel's reference to structural changes to the GST comes on the heels of central government plans to merge the 12% and 18% GST slabs, an idea that has found support among some states. The idea is to address the erosion of the incidence of indirect taxes on transactions after GST rollouts. The Fifteenth Finance Committee (FFC) also urged the government to restore "GST rate neutrality", which has been compromised by multiple interest rate cuts.

Although some transformative changes were introduced to step-up tax revenues, India's tax buoyancy has not been in line with income and wealth growth, according to the report. In developed countries, the ratio of taxes to GDP is around 25-26%. The commission said that most of India's national income comes from those unable to pay taxes, which explains why India's tax-to-GDP ratio is around 10%. "Given the restrictions on increasing tax rates, including their adverse economic impact, the committee expects to generate higher revenues through tighter enforcement and greater compliance," the report read.

Since July 2017, more than 17,000 entities have booked and more than Rs 2800 crore have been recovered from false invoice cases. The team recommended raising awareness of the GST structure and applying punitive measures against assessors for non-compliance on a larger scale.

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