3% GST rate for gold is low: Economic Survey II

Chief Economic Advisor Arvind Subramanian batted for a higher goods and services tax (GST) rate for gold and jewellery in the Survey, arguing these were consumed by the rich. 

The Survey also argued for inclusion of electricity, real estate, health and education in the GST framework, rolled out from July 1. “There is a need to simplify the GST tax structure in the medium term,” Subramanian told journalists.

The GST is expected to result in price reduction on account of lower taxation as compared to the combined incidence of central and state taxes previously, the Survey noted. 

It added that deflationary tendencies, including transitional friction from GST implementation, weigh on the economy, which was yet to gather full growth momentum.

Gold, disproportionately consumed by the “very rich” is taxed at three per cent under GST, which the Survey said was “still low”.  The view comes at a time when a flood of gold import from free trade partner South Korea has alarmed the government. A few entities are exploiting the favourable reduction in tax incidence under GST by routing its import through Korea, as they need to pay only the three per cent Integrated GST, as against a 10 per cent customs duty. Earlier, a 12.5 per cent countervailing duty needed to be paid; GST has subsumed this.

In all, GST has subsumed 17 indirect taxes at the Centre and state levels — value added tax (VAT), excise duty, service tax and octroi, among others.

The Survey made a case for bringing the remaining goods and services also in the GST net, to improve competitiveness, transparency and efficiency. “Bringing electricity into the GST framework would improve the competitiveness of Indian industry because taxes on power get embedded in manufacturers’ costs, and can be claimed back as input tax credit,” it said. 

Inclusion of land, real estate and alcohol in GST would improve transparency and reduce corruption, it said.

Keeping health and education completely out of the tax net was ‘inconsistent with equity because these are services consumed disproportionately by the rich.’

GST, it said, was not more complicated than the system it replaced. “Every good (earlier) faced an excise tax levied by the Centre and a state VAT. There were at least eight to 10 rates of excises and three-four rates of state VATs, the latter potentially different across states. So, a structure of multiple rates (as much as 10 times and 4 times 29 states) has been reduced to a structure of six rates.”

 GST has six broad slabs — zero, three, five, 12, 18 and 28 per cent, beside a compensation cess on luxury items, including cigarettes, cars and aerated drinks.

The Survey said GST would stimulate investment in the economy, as the scope of input tax credit for capital purchases would increase the tax base through better compliance and the embedded taxes in exports would be neutralised. 

In another “hidden benefit”, the Survey noted that in the  textile and clothing sector, now fully part of the tax net, there is a check on informalisation and evasion. 

“Some anomalies favouring imports of fabrics over domestic production will need to be rectified but, overall, the tax base has expanded.”