Towards greener GST: Rationalisation must align with jobs, sustainability

GST rate rationalisation and expansion must be done not only to achieve simplification but also to subserve large-scale employment and environmental policy goals

After nearly eight years of the implementation of the goods and services tax (GST), make no mistake we can be truly proud of what we have achieved — a unified tax across the country and the removal of internal barriers to the movement of goods.  Added to this is the creation of a technical platform for carrying out three business processes online — registration; payment of duty; and filing of returns. While these achievements are significant, we now need to simplify the GST rate structure and also inject further buoyancy in revenue growth by correcting the fall in the incidence of duty from 14.8 per cent in the pre-GST period to around 12 per cent now. It is also suggested that this opportunity for rate rationalisation be used to achieve other economic goals such as boosting employment and reducing environmental pollution. 

Today, if there is a problem weighing on policymakers, it is employment generation. There is now some consensus that the key to boosting employment lies in the growth of four labour-intensive manufacturing industries, namely textiles (from yarn to fabrics of both cotton and man-made fibre), leather and footwear, food processing, and toys. Therefore, as a starting point in the rate-rationalisation process, we should bring all these four product categories under the merit rate of 5 per cent, which must now be raised to at least 8 per cent to allow for input tax credits to flow seamlessly without accumulation. This should be combined with imposing zero rate on all single-use inputs and intermediates used in these four sectors. This import duty regime should be allowed for imports from all countries under the Most Favoured Nation (MFN) arrangement. This will give a boost to these labour-intensive industries and also encourage foreign direct investment in these sectors, which has not yet happened. 

The present 12 per cent GST rate needs to be merged with the standard rate of 18 per cent, but before this is done, apparel and pharmaceuticals must be brought under the merit rate of 8 per cent (suggested). It is also necessary to phase away the various exemptions to provide seamless flow of credits in the GST chain. In order to provide guidance for these measures, it is important that only those exemptions be retained that were value-added tax (VAT)-exempt in the pre-GST period. This suggestion was made in a report submitted in 2015 by a committee constituted for dual control, capital threshold and exemptions. The demerit rate of 28 per cent needs to be revised upward after the abolition of all cesses. This would be an important measure of simplification. While doing this, it would be necessary to bring down the rate of duty on cement from 28 per cent to 18 per cent (revenue loss would be significant). Two-wheelers and all the white consumer durable goods such as washing machines, dishwashers, and air conditioners are currently taxed at 28 per cent, which is not justified. Reducing the rate of duty on cement would boost employment by stimulating construction activity. 

Finally, the GST rate rationalisation should be used as an opportunity for ‘greening the GST’. We can do this by bringing all electric vehicles (EVs), both two-wheelers and four-wheelers, from 28 per cent to the standard rate of 18 per cent. This would imply de-linking the duty rate from capacity and size considerations. Similarly, all single-use capital goods and components going into the renewable energy sector should be brought down to the merit rate duty of 8 per cent (suggested). In order to compensate for the loss of revenues due to the thinning of items in the 28 per cent rate category, the demerit rate should be raised to 45 per cent without cesses. 

Another suggestion to counter the revenue loss would be to raise the duty on gold and silver products to 6 per cent from the present level of 3 per cent. An NCAR study cited in the GST report submitted in 2015 showed that all the transactions of gold and silver (about 90 per cent) took place in the top two income decile category of the population. 

On this basis, the suggested duty rate structure would include an exempt rate for a few items that were VAT exempt during the pre-GST period, 8 per cent (merit rate), 18 per cent (standard rate), and 45 per cent (demerit rate without cess). It is important that the government desists from imposing dual GST rates based on value for the same product category. This would add complexity and encourage administrative harassment. 

On the expansion of items within the ambit of GST, it is suggested that this exercise be done in phases after creating a consensus with the states. In the first phase, the expansion may be confined to aviation turbine fuel and natural gas, which are mainly used as intermediates and are part of the B2B transactions. States may be consulted for bringing in the renewable energy segment of electricity within the GST. This would be helpful to the sector for it is characterised by high capital cost and low operating cost. Bringing them under GST would allow the manufacturers of this equipment to avail of GST credits up to the final stage of electricity generation. 

The suggested idea for rationalisation of the GST rates would bring down the incidence of duty on a number of mass consumer goods and services like medicines, clothing, footwear and affordable housing. Durable white goods will become cheaper and more affordable to the expanding middle class. The average duty incidence would also go up slightly, from 12.2 per cent now to about 13 per cent, injecting some revenue buoyancy, but this burden will be largely borne by the more well-to-do section of society. 

In conclusion, GST rate rationalisation and expansion must be done in a manner not only to achieve simplification but also to subserve large-scale employment and environmental policy goals. This will facilitate public acceptance and fortify the perception that the GST reform has been the most significant economic reform in post-independent India. 

The author is former member, Central Board of Indirect Taxes and Customs