Remove tax uncertainty

GST should move towards more simplicity

There is no doubt that the goods and services tax (GST) has the potential to make far-reaching positive changes to the structure of the Indian economy. It may, as time passes and as it is fine-tuned, reduce costs all round and lead to great efficiency gains by ensuring businesses find it easier to operate in the country. However, it is also true that the current GST is an imperfect political compromise, with too many different tax rates and too much scope for rent-seeking and alteration that would dilute the positive impact of this reform. It has become increasingly evident that to unlock the true potential of the GST’s gains, governments at both the state and central levels — as represented in the GST Council — must have a clearer sense of the direction in which tweaks to the GST need to be made. 

Such alterations are already becoming visible. The 20th meeting of the GST Council, held on Saturday, decided to increase the cess on luxury cars and sports utility vehicles from 15 per cent to up to 25 per cent. The decision on when to raise the cess will be taken later. Among other things, the Council slashed the tax rate for textile subcontracting — “job work” — to 5 per cent from a high of 18 per cent. The rate of taxation on tractor parts was also reduced. Absurdly, goods and services related to the Under-17 Football World Cup were completely exempted. And, for some reason, the GST on tickets for entering planetariums has been reduced. This is precisely the sort of tinkering that could have been avoided with a simpler tax structure. What is the logic underlying the decision to examine some issues and not others? Which sectors are being given preference and why? Why are planetariums singled out and not, say, private art galleries? Why one sports event and not others? This is the kind of discretion and policy uncertainty which the GST was supposed to end. It enables rent-seeking and corruption and distorts economic effort.

The GST Council should focus on examining problems with the actual administration of tax; if it instead uses its regular meetings to decide on such frequent changes, cesses and exemptions the GST will end up being less predictable and more prone to abuse than the previous system. Of course, the current GST is unquestionably a work in progress. The structure of the GST Council has been designed so that the tax regime can be constantly updated and improved. But the changes and tweaks made to the regime must be in the direction of greater simplicity and ease of use. There should be a high bar for the adoption of sector-specific exemptions and rate changes. It is still early days for the new indirect tax regime, so it is to be hoped that constant changes will not become the norm. But the impetus towards simplification must begin now, at least in the rhetoric. The Union finance ministry, which deserves credit for steering the GST through the various political shoals that imperilled it, must again take the lead in this process of constant improvement.