GST: A big step forward

GST Council has done productive work, but more remains

The GST Council, which met for the 15th time on Saturday, thrashed out several pending issues. These included the rules for transitioning to the new tax regime and the tax rates on biscuits, gold, footwear, and textiles. This would be an appropriate moment to reflect on the work that the GST Council has done in its set of apparently endless meetings. While there has been understandable impatience as the Council has taken a while to decide on rates and rules as the July 1 deadline comes ever closer, it is also worth noting that the meetings have, in the end, been productive. Both the GST Council and the central government have done a creditable job in sorting out these deeply problematic issues.

In the end, while the GST structure is not perfect, it can certainly be defended as reasonable. The tax rate on gold, for example, appears low at three per cent; but it is important to note that gold is a unique commodity in that it is particularly prone to being smuggled into India. Given that, it is important to set a tax rate on transfers of gold that is low enough to disincentivise such smuggling, which has harmful societal effects. Concerns remain about the GST’s “anti-profiteering” clause, which seeks to ensure that any reduction of the incidence of tax after the introduction of the GST is passed on to consumers. This clause has rightly been criticised as being unnecessarily intrusive in a market economy — and for allowing far too much leeway to tax officials, and opens the door to harassment and bribery. The government has at least sought to assuage these concerns through an assurance that the GST Council will set up a committee to look into complaints about the use of the anti-profiteering clause.

The GST that India appears likely to get on July 1 is a far cry from what was originally planned and conceived. It is far more unwieldy and intrusive than imagined, or than it should be. It has too many tax rates and too much provision for lobbying, rent-seeking, or harassment. But the important thing is that long-needed changes have been initiated. It is important for the government and the GST Council to remain flexible, and to address issues as they arise. It is also of importance that the Council lay down strict timelines and make sure stakeholders stick to them. 

A crucial element in this will be to discourage any more lobbying for the fitment of rates. Already, considerable such lobbying has been reported, as industries and sectors seek to move from one band to another. However, if people continue to ask for lower rates for their product, that would muddy the clarity of the structure and weaken compliance. Eventually, in order to make such lobbying less productive, the GST Council must keep in mind that two bands of taxation are ideal, and the medium-term goal for the Council must be to move towards reducing the number of bands of taxation under the GST.