compromised GST

The Goods and Services Tax (GST) was expected to provide for moderate rates of tax, with only a couple of tax slabs — so designed to improve compliance, avoid classification disputes and keep matters simple. It was also intended to provide for comprehensive coverage and, therefore, an efficiency dividend in terms of better tax collection. Unfortunately, as things seem to be turning out, none of these objectives may be realised. Compromises along the way to getting approval for the new tax regime have meant that this long-awaited legislative reform will end up as a lost opportunity. There are too many tax slabs — as many as four main ones, and a total of seven categories, ranging from zero to an undefined level beyond 26 per cent. The estimates made in the past by expert committees and by government officials had led the country to believe that the main tax rates would stop short of 20 per cent; the figure mentioned during the Parliament debate was 18 per cent, which was also the broad level indicated in a report by the chief economic advisor in the finance ministry. Instead, it now turns out, the two most important rates of tax will be 18 and 26 per cent, with almost all items of middle-class consumption attracting the higher of these rates. The 12 per cent rate will be mainly for intermediate products, added to which is a concessional slab of 6 per cent. The introduction of this last slab is the direct result of a desire to not tax items of mass consumption in any way that might push up their prices. It bears pointing out, therefore, that food, education, health care and other key items of common expenditure are to be completely exempt from the GST. The result of the multiple rates is that what is a flat tax in other economies has morphed in India into a progressive tax system, with the top rate being hiked to 26 per cent in order to neutralise the revenue loss from the six per cent slab. The result is precisely what a GST should not be. As Vijay Kelkar and others have argued, in an article inMint newspaper, any negative impact of a properly constructed GST on the poorer sections is better taken care of through a direct benefit transfer scheme, so that the GST system does not lay itself open to evasion, classification disputes and other complications — all of these are the hallmark of the existing indirect tax system, which GST was supposed to change. There is more. What is one rate of service tax today is to give way to three rates! While most existing cesses will cease to exist, one or more will continue to be charged. Finally, there is the aggravation of ~50,000 crore to be collected as a contingency to compensate states for any revenue loss. First, it should be obvious that no state is going to lose revenue at the proposed rates of tax; the sum to be collected as insurance against revenue losses will probably add a percentage point to the overall tax rate. Second, GST was supposed to deliver efficiency gains through better coverage; the proposed rates of tax seem to make no assumptions at all on this point, and it is pertinent to ask why. It is not too late to adopt reasonable rates as the GST Council will meet again in early-November. – www.business-standard.com[20-10-2016]