Three rates better than one flat rate in the goods and services tax

In India, the situation of people is such that if we charge items more commonly purchased by poor people at 18%, there will be serious repercussion

After the Prime Minister (PM) made a strong case against a flat rate in the goods and services tax (GST), the debate has assumed more importance. A flat rate versus multiple rates has been a controversy all along. There are supporters on both sides. Australia, Cambodia, Chile, Denmark, Israel, Japan, South Korea, Nepal, New Zealand, Taiwan and most African nations do have flat rates. 

But, these countries are not having much of disparate strata. Inequality of income is not so rife. Let me mention some countries with different rates. Belgium — 21, 12 and 6; Brazil — 25, 18, 12 and 7; Canada —7 as central GST but there are seven different rates as sales tax in different provinces. China— 17,13; France — 19.6, 2.1, 5.5; Germany — 16,7; Italy — 20,10,4; Russia — 18,7; Sweden — 25,12,6; Switzerland — 2.4 3.6 and the UK — 17.5, 5.  These are not the latest, as these keep on changing but the fact remains that they have got multiple rates and all countries have exemptions.

In India, the GST rates are zero, 5, 12, 18 and 28.  People are calling it five rates. It is actually four rates. Nil or zero per cent is not a rate. There are exemptions in all countries even where only one rate is there. Apart from that, there are exemptions for export, which every country has. Exemptions are given for what is known as zero rating of export. Zero-rating is different from zero rate. If it is zero or nil rate, then only the output or export is exempted. In the case of zero-rating, even the input is also exempted. 

For example, if textiles are exported, it is not only that the final form of the textile is exempted but the input in making the textiles — cloth, starch, colours or pigments used for colouring the cloth or the materials used for processing like water proofing — are all exempt. It is sometimes achieved by subsidies but it is easier to give by exemptions and all countries do it. So, to match the other countries, India has to do it. Otherwise, Indian goods will be out-priced. 

We have to examine how much this is justified. Currently, goods are listed as falling in five per cent and 28 per cent and the rest are either in rates 12 or 18. This is where the problem arises. The government has accepted the big fat excise tariff, internationally based on Customs cooperation nomenclature, as the guide to place in the proper rate. 

For fixing the rates, the GST Council has made a Fitment Committee. Obviously, they will place more goods on 18 per cent, as there is a revenue shortfall after GST. The collections are Rs 922.83 billion in July 2017, Rs 906.69 billion in August, Rs 921.50 billion in September, Rs 833.46 billion in October, and about Rs 820 billion in November. If we merge the two rates into 16 per cent, it will have several advantages. First, this was the most common rate, where nearly 85 per cent goods fell for a long time, since it was announced that it is the desired average rate several years ago. Industry is used to this rate. Second, goods falling into the five and 28 per cent rates being specifically listed, all others will fall here and there will be no need for the big fat excise tariff. 

The conclusion: While theoretically one rate is the best, the best is often the enemy of the good, as Voltaire said. It is like the neutrality of tax which can be reached only in theory. PM (Narendra) Modi is right that we cannot have a flat rate now. In India the situation of people is such that if we charge items more commonly purchased by poor people at 18 per cent, there will be serious repercussion. So, the best rates would be 28 per cent, 16 per cent (merging 12 and 18 per cent) and five per cent. Litigation will be rare. It will be a progressive tax, though indirect tax is basically regressive. With a progressive rate for income tax, the total tax structure will be progressive. Revenue will boom, as controversy, evasion and corruption will be minimum.

The writer is member, Central Board of Excise & Customs (retired). Email: smukher2000@yahoo.com