NEW RATE STRUCTURE
In its meetings held on Nov 3-4, 2016, the GST (Goods and Services Tax) Council arrived at a consensus on the rate structure even as it failed to hammer an agreement on an equally contentious issue of who (read Centre or states) will exercise administrative control over which tax. For now, the next meeting has been deferred till Nov 23, thus casting shadow over the government’s ability to meet the April 1, 2017 deadline to kick off the new tax regime.
The Council has opted for four rates – 5% for essential and daily use items, two standard rates of 12% and 18% and highest rate 28% on so called de-merit goods such as luxury cars, aerated beverages, pan masala and tobacco products etc. Additionally, it has decided to go for a cess on the de-merit goods.
How does it compare with the rate structure recommended by a panel under the chief economic adviser (CEA)? 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.
The Council has made two major changes. First, it has carved out two classes out of lowest rate slab keeping essential items at 5% and shunting 12% to standard rate besides 18%. Second, on de-merit goods, it has recommended 28% which is substantially lower than 40% proposed by the panel. But, this is nothing but skullduggery as the lower rate is accompanied by a cess.
There is absolutely no possibility of the cess being kept at a level that would bring the total incidence (tax plus cess) to anything less than 40%. Under extant dispensation, many of such goods are taxed even higher than this – some even going up to 60% plus.
The zeal to tax them at high rates has not diminished; so we will see cess at a minimum 12%. In fact, going by Union Finance Minister Arun Jaitely’s statement that tax on these items would be at the same level as at present, there would be multiple cesses.
Yet, the idea behind this ‘disingenuous’ game plan is to ensure that the Centre 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 five years as envisaged under the Constitution Amendment Act enabling levy of the GST.
The logic is flawed and contrary to the underlying philosophy of GST. It does not recognise the inherent power of this new transformative tax 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 the 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 its sheer act of forcing conversion of fake/‘kachha’ bills in lieu of proper bills on the one hand, and enhancing the efficiency in every aspect of the supply, movement and distribution chain leading to higher GDP and tax base on the other.
Hence, states won’t lose revenue and no bail out by the Central government would be necessitated. Even manufacturing states like Maharashtra, Gujarat, Tamil Nadu, Karnataka etc have nothing to fear as any loss in goods segment can be offset by substantial revenue flowing from their power to tax services under the GST regime (they also happen to be major hubs of services thereby ensuring a fairly large base).
In this backdrop, any move to levy cess in the garb of having to compensate states for the (non-existent) loss is unjustified. It violates the basic tenet of GST in much the same way as the 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 the underlying philosophy of GST, how can a cess by the Centre – in addition to GST – be justified?
‘Unified’ character
By mooting a 4-tier tax structure – 5%, 12%, 18% and 28% (there will be five tiers if exempt category is also included) – the Council is also making an assault on the ‘unified’ character of GST regime. Indeed, with multiple cesses, the number of tiers will multiply making the new regime no different than extant system.
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. But, here we are going beyond carving out two categories – 5% and 12% – even within the list of essential items and many more out of de-merit category.
This will do a collateral damage of giving discretion to bureaucrats/assessing officers. It could open up a Pandora’s box 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?
All such onslaughts on the very soul of GST are happening because states are ‘reluctant’ partners in the change-over. They are not fully wedded to this reform. It is like keeping the car in the second gear and yet wanting to have all the pleasure and benefits of full speed 80 km plus. They need to shift gears as that alone will make way for a tax structure that is truly aligned to its underlying spirit and potential.
(The writer is a New Delhi-based policy expert)
http://www.deccanherald.com/content/579730/dont-fiddle-gst-soul.html