The GST Council created via the constitution amendment act on GST [Goods and Services Tax] that includes the finance ministers of all states and headed by union finance minister, Arun Jaitely is currently having brainstorming sessions to decide on the rate structure, slabs, exemptions etc. In this regard, all crucial numbers are expected to be finalized in its next meeting slated for November 3-4, 2016.
Meanwhile, from deliberations thus far, a consensus view appears to be emerging in favor of 4 rates viz., 6% for essential and daily use items, two standard rates of 12% and 18% respectively and the highest rate 26% on so called de-merit goods such as luxury cars, aerated beverages, pan masala and tobacco products etc. A cess on the de-merit goods is also contemplated.
How does it compare with the rate structure recommended by a panel under chief economic adviser [CEA], Arvind Subramanian? The Panel had proposed 12% for essential goods, 40% for de-merit goods and standard rate of 17-18% on all remaining goods. It excluded real estate, electricity, alcohol and petroleum products while calculating rates but suggested bringing them under the ambit of GST soon.
A major change by GST Council vis-à-vis Dr Arvind’s panel is in regard to taxing the de-merit goods. While, the latter recommended tax rate of 40%, the former has reduced this to 26%. But, that is skulduggery. The lower rate mooted by the Council is accompanied by a cess on such goods. At what rate will the cess be fixed?
There is absolutely no possibility of this being kept at level that would bring the total incidence [tax plus cess] to anything less than 40%. Under the extant dispensation, many of such goods are taxed even higher than this some even going up to 100%. The zeal to tax them at high rates has not diminished; so we will see cess at a minimum @14%; in fact, there could be multiple cesses some of them like pan masala expected to be set much higher.
The idea behind this bifurcation in to two components is primarily to ensure that the center gets to retain a larger share of revenue because under the constitutional scheme of things, it does not have to share with states even a rupee out of collection from the cess. It has justified this by saying that it needs resources to fully compensate states for loss of revenue for 5 years as envisaged under the amendment act.
The logic is flawed and contrary to the underlying philosophy of GST. It does not recognize the inherent power of this new transformative structure. It is a ‘single’ and ‘unified’ tax regime and is intended to bring almost all business transactions under its fold in sharp contrast to existing ‘multiple’ and ‘opaque’ system that gives ample opportunity to entities evade payment of tax.
The GST dispensation has the potential to generate much higher level of revenue by the sheer act of forcing conversion of fake/‘kachha’ bills [to use the euphemism used by prime minister for describing the mountain of transactions done in black] in to proper bills on one hand and enhancing the efficiency in every aspect of the supply, movement and distribution chain leading to higher GDP/tax base on the other.
There should be no doubt that states won’t lose revenue necessitating bail out by central government [a provision for compensation in the constitution amendment act should only be seen as an act of ‘facilitation’ to make former feel safe and take them on board]. Even manufacturing states like Maharashtra, Gujarat, Tamil Nadu etc have nothing to fear as any loss in goods segment can be offset by substantial revenue flowing from their power to tax services. Needless to say, they also happen to be major hubs of service provisioning.
In this backdrop, any move to levy cess purportedly to garner additional revenue only to compensate states for the loss is unjustified. It violates the basic tenet of GST in much the same way as 1% tax on inter-state sales [going to the originating state] which Jaitely was eventually forced to drop. Further, if state imposts like purchase tax, entry tax or octroi etc are out of sync with GST and have been subsumed in latter, how can a cess to be levied by center – in addition to GST – be justified?
Dr Arvind panel had recommended a 3-tier tax structure viz., 12%, 17-18% and 40%. That was bad enough being contrary to the ‘unified’ character of GST regime. The Council seems to be making it worse by mooting a 4-tier tax structure viz., 6%, 12%, 18% and 26%. In fact, including the items that will be exempt, there will be 5 tiers. And, if one accounts for multiple cesses then, the tiers will be many more.
It seems that our policy makers have not yet given up their old traits of treating various items ‘differentially’ even while embracing a unified tax concept. In principle, even exemption should have no place under this concept [even so, zero tax on an item like food could have some sanctity if this had ensured low prices; but in reality, prices are high filling coffers of profiteers even as government gets no revenue]. But, here we are going beyond creating two categories viz., 6% and 12% even within list of essential items.
This will do a collateral damage of classification issues, problems of interpretation and give lot of discretion to bureaucrats/assessing officers. It could open up a Pandora of corruption with business entities lobbying with the officials to get their products included under a class that attracts a lower tax. A major objective of GST is to eliminate corruption and black money. Why then, the government is sowing seeds for another source of corruption?
All such onslaughts on the very soul of GST are happening because the states are ‘reluctant’ partners in the change-over. They are not fully wedded to this reform. It is like keeping the car in second gear and yet wanting to have all the pleasure and benefits of full speed 80 km plus. They need to shift to 4th/5th gear and that will make way for a tax structure that is truly aligned to its underlying spirit.
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