GST has to resolve anomalies in tax structure

Parsa Venkateshwar Rao Jr

Senior Journalist

THERE are few or no critics of the Goods and Services Tax (GST) regime, which had been in the formulation stage before Prime Minister Narendra Modi assumed office in 2014; he rolled it out with fanfare in July 2017, after his disastrous demonetisation measure of November 2016. There was a midnight Parliament session to mark the passing of the GST legislation. Five years later, in the middle of economic uncertainty, and eight years of the Modi government, the GST seems to be a formidable landmark, much less in dispute than all the acts of omission and commission of this government.

But even the government is not claiming it as an achievement because it is recognised as work in progress and that there is much more to be done to call it an accomplished task. Finance Minister Nirmala Sitharaman and her officials in the ministry are only pointing to the little successes like improving tax collection. From the Rs 1 lakh crore target, it has climbed to Rs 1.4 lakh crore and more, and this increase in number is cited as evidence that the GST is a success.

Strangely enough, the government sounds like a corporation, where the corporation aims at profit maximisation as a sign of success, and now the government takes pride in the fact that revenue maximisation is the pinnacle of success. Of course, ministers explain now and then that the tax revenue is being spent for the welfare of the people. There is also the other explanation that tax evasion has been plugged through demonetisation and the GST, an unverified claim.

An interesting aspect of the government’s thinking on GST is that the country is moving towards tax maximisation, and from the existing 11 per cent tax-to-GDP ratio, it could go up to 20 per cent in a few years’ time. And on the way, the states would be realising revenue they seemed to have lost through the new system. And through the GST Council, comprising the Union Finance Minister and the State Finance Ministers, a bureaucratic mechanism has been established that seems to work out the inescapable nitty-gritty involved in tweaking tax rates. They call it rationalisation of the system. The latest example is the decision at the 47th GST Council meeting, held in Chandigarh recently, of correcting the anomaly of inverted duty structure where the component elements are liable to greater rates than the final product. So, there is an increase in the rates for dairy and milking machines; milk, buttermilk and curd have now been subjected to GST, as well as forks and spoons. The tax calculus remains all Greek to the ordinary people, but it is a delight for the tax experts. They remain beyond the pale of public scrutiny, as well as that of the Parliament and Assemblies which finally have to pass the necessary legislation.

At the 47th GST Council meeting, the rate for pencil sharpeners, paper knives, printing, writing and drawing ink, power-driven water pumps and LED lamps have been increased from 12 per cent GST to 18 per cent. No questions are asked and no explanations given for the reason behind this decision or many others like this one. Of course, tax administration requires constant revision and there are perhaps good and bad reasons for doing so. But the matter is now decided by the GST Council and the committee of finance ministers that the Council sets up to resolve some of the issues.

While there may be transparency about the rates and collections, there is not much of it shifting taxable items from one slab to another. A statistical profile of the goods falling under each slab of the GST shows that now 46 per cent of the goods taxed fall in the 18 per cent slab, which is not exactly in the middle of rate spectrum ranging from 5 per cent to 28 per cent. Apparently, in 2017, the 18 per cent slab accounted for 33 per cent. So, people are paying more for more goods. Ideally, most goods should be in the lower slab of 5 per cent and 12 per cent. There are now 37 items in the 28 per cent slab, 636 in the 18 per cent, 249 in the 12 per cent, 288 in the 5 per cent, and 166 exempted goods. And there is the fact that GST is not coterminous with all the taxes and cesses levied in the country.

Optimists point out that it will be some years before one can reach the ideal of two rate slabs instead of the present five, and the GST utopians who argue for a single rate have been silenced by the argument of sin goods versus merit goods, and how the two cannot be put under the same rate. As most people interested in tax issues seem to be enamoured of GST, no one has critically examined the rationale of the idea itself and its implementation. It’s Tamil Nadu Finance Minister Palanivel Thiagarajan who has expressed his reservations about the GST as a system; he talked of the states being deprived of the right to tax and how GST erodes the federal system. Most politicians are afraid to express their opinion on taxation because they are intimidated by the subject, and of course most politicians also do not understand that in a democracy, people must approve the taxes that any government imposes, and that the people have a right through the elected representatives to decide on taxation.

The GST, conceptualised by bureaucrats who have little or no democratic qualms, and who are more interested in improving the efficiency of a tax system, has created a maze which is as misleading as the pre-GST tax structures. But there is a flaw in the GST slab rates as they exist now — the difference between one rate and another. There is a difference of 7 percentage points between the 5 per cent and 12 per cent rates; 6 percentage points between the 12 per cent and 18 per cent rates; and 10 percentage points between 18 per cent and 28 per cent rates. The rate differences are a little too glaring to be described as rational. 

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