On completion of one year since launch of GST [Goods and Services Tax] on July 1, 2017, even as NDA – government gets into celebration mode, it is also facing heat from the main opposition party [read: Congress]. The latter has resurrected its main plank of criticism that the extant architecture of multiple tax rates [zero, 3%, 5%, 12%, 18%, 28% plus a number of cess on certain demerit items in 28% slab] is far removed from an ideal ‘single’ rate.
Reacting to the above, prime minister, N Modi has opined that in a country such as India wherein there is preponderance of poor, ‘the tax on food and other essential items cannot be the same as on Mercedes-Benz car’. His response is in the same vein as an observation made by union finance minister, Arun Jaitely [also the chairman, GST Council – all powerful constitutional body which is tasked with determination of the tax structure and the rates] last year within a month of the launch of this tax.
When, confronted with a question as to why we cannot have one or two rates in consonance with the global practice, Jaitely opined that for India with wide disparities in incomes and widespread poverty ‘the tax on an item like chappal [mostly used by the poor] cannot be the same as on a luxury car which is the privilege of a rich person’.
Under a single tax regime, every person including the poor and the rich pays tax at the same rate on all commodities and services. This may sound unfair and inequitable, but, its beauty lies in ‘simplicity’ and ‘ease of administration’. No wonder, a committee set up by 12th Finance Commission under Dr Vijay Kelkar had recommended a single GST @ 12%. The inequity aspect is best tackled under the direct tax regime which taxes rich at a much higher @ 30% than a low income earner paying @ 10% or nil tax.
Even so, a panel under then chief economic adviser [CEA], Dr Arvind Subramanian had proposed a 3-tier structure viz. 12% for essential goods, 40% for so called de-merit goods [luxury cars, aerated beverages, pan masala and tobacco products] 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.
An architecture carved on these lines would have taken care of the point made by Modi/Jaitely [vide keeping tax on essential products substantially lower than de-merit goods] without compromising too much on simplicity.
But, in an obsession to micro-manage things based on ‘who is expected to use which item depending on his income profile’ has led the Council to adopt multiple slab rates and cumbersome classification of goods and services in different slabs and further sub-classification of the same item in different slabs depending on value.
There are a host of distinctions such as branded versus unbranded food; AC versus non-AC restaurants; economy versus executive class etc. The tax rate is different depending on the class. Furthermore, for any given item, the applicable rate varies depending on its value. For instance, a footwear valuing less than Rs 500/- attracts 5% GST whereas the same item costing more than this amount will attract 18%.
A highly differentiated tax structure gives too much discretion to the bureaucrats. In such a regime, corruption and nepotism is inevitable even as business entities lobby to get product of their interest included in the low rate category. This is out of sync with Modi’s philosophy of zero tolerance for corruption.
Thanks to the pursuit of such an approach, several items of mass consumption viz. soaps, detergents, shampoos, chocolates, cement, paint etc had got included in the highest tax slab of 28%. The Council was forced to move many of these items to lower slab but a number of them such as cement, paint etc still attract the highest rate.
Even an item like car which has a luxury tag, considering that for millions from the middle class, this is a virtual necessity, taxing @28% is a bad idea. Further, hybrid cars [these run on a mix of electric and fuel] attract cess of 15% in addition to 28% tax. These are environment friendly vehicles and their use needs to be encouraged but high tax militates against this overarching objective.
Without doubt, the extant GST architecture is far from being simple if not ‘Gabbar Singh Tax’ – to cite a euphemism used by Rahul Gandhi. The government has also not paid much heed to the much adumbrated equity objective. Or else, it would have included petrol and diesel whose prices include a high tax component of 50% [under excise/VAT dispensation] and affect majority of the poor by increasing cost of a wide range of goods and services including transport.
While, categorically ruling out a single tax, Jaitely has alluded to reducing the number of slabs. But, this is predicated on how things evolve especially in regard to desired buoyancy in revenue collection. This sounds like putting the cart before the horse. The desired increase in tax collection under GST is not coming primarily because of the present convoluted tax structure.
Arguably, with implementation of various anti-evasion measures like e-way bill, matching of invoices, reverse charge mechanism, simplification of return filing etc [all kicking in this year], the revenue will improve. However, as per government’s own estimate, the monthly collection during 2018-19 are expected to be Rs 100,000 crore as against Rs 90,000 crore in 2017-18. This is peanuts when compared to the potential.
Modiji talked of 4.8 million additional businesses having got registered under GST over the existing 6.6 million [under excise and VAT] who have shifted to GST. But, this is small in relation to about 65 million enterprises in the informal sector. Even if half of them had joined the composition scheme [hence, do not have to register] then also those coming in are just about 15%.
Clearly, the untapped potential is huge. But, this will require the Council to switch over to no more than three tax slabs immediately and eventually to a single rate within a reasonable time frame.