The die seems to have been cast for a multi-rate goods and services tax (GST) regime that will also have many exempted categories. Instead of embracing an ideal model of one or two rates, the new tax system, as adopted by the GST Council on Friday, will have as many as four rates. In addition, there will be a cess and a zero rate on the exempted category. There is a strong possibility of yet another rate of four per cent to be levied on gold. For services, instead of a single rate now, there will be two rates in addition to the various abatement rates for several specified services. Effectively, therefore, there could be as many as seven rates for goods and at least two rates for services. There is no doubt that this will not only significantly dilute the originally proposed character of the indirect tax reform but also undermine many gains expected from GST, such as removing the cascading effects of taxation, enhancing efficiency in tax administration and higher growth.
Indeed, the proposed regime will perpetuate the existing weaknesses of discretionary taxation and become an administrative burden that the revenue departments could very well do without. Worse, classification disputes and business lobbying over which items or services should come under the lower or the higher slab will multiply. Under the influence of the revenue departments of the Centre and states, the GST Council may be inclined to include more items under the peak rate to protect their revenue streams. This may often be counter-productive, resulting in higher incidence of tax evasion. The proposed cess, too, will complicate the duty set-off process and neutralise its benefits. Since cess is not part of the divisible pool, the states will complain about the loss of their share in such collections. Cess revenues are likely to be fungible and this may encourage the continuation of cess for much longer than it would be required to compensate the states. And if half of the items under the consumer price index are exempted and some petroleum products, alcohol, electricity and real estate are outside the purview of the new tax regime, the set-off benefits for a large segment of the value chain may not accrue.
The government has explained that a multi-tiered GST regime would help keep items of consumption by the poor at zero or five per cent and soften the impact of inflation on them. This argument is flawed as the goals of taking care of the poor could have been achieved by intelligent use of the direct benefits transfer scheme available at the government’s disposal without damaging the basic structure and intent of the GST. The need for compensating the states for their revenue loss for five years is perhaps understandable, but the levy of a cess, in that case, should have a clearly defined sunset clause.
There is still some time left to salvage the GST from its current imperfections. The GST Council would do well to commit itself to a timeframe within which the number of rates should be reduced to two standard rates and exemptions should be eliminated. An equally formidable challenge before the Council is to ensure that the assessment procedures do not become cumbersome and the need for multiple registrations for industry and trade is eliminated. If these steps necessitate a postponement of the GST roll-out then that too should be debated.
