Dr. Ashwani Mahajan
A big breakthrough towards implementation of GST has been achieved in a meeting of GST Council held on 3rd November 2016, where a consensus was reached about rates of GST amongst States and the Centre. GST council has cleared the air about the number of GST rates and has decided that there would be 4 rates of taxes namely 5 percent (on common consumption goods), 12 percent, 18 percent and 28 percent (on non merit goods like tobacco and luxury goods). Apart from this it has also been decided to impose no GST on food grains to ease inflation.
Big question today is, whether the GST which is emerging in the present scenario is the one, which was perceived earlier, as an efficient, revenue raising, anti-inflationary and growth promoting; or is yet another ‘reform’ struggling for implementation, far from its perceived objectives.
GST has been looked upon as a major tax reform, as most of the indirect taxes imposed by the centre and the states would be subsumed under one GST. It is claimed that doing away with different taxes imposed on goods and services at various stages of production would help reducing the burden on the ultimate consumer, by way of eradicating the cascading effect. Cascading effect take place due to tax on commodities and services at various stages of production and causing increase in cost/price more than the amount of the tax. Earlier tax reform of bringing MODVAT, in place of union excise duty and VAT (Value Added Tax) in place of state sale tax were also intended to reduce cascading effect. However, due to the fact that other indirect taxes continued to be imposed, intended benefits could not accrue to the economy. Now with the implementation of GST at central and state levels, Central Excise Duty, Service Tax, Central Sales Tax of the Central Government and Sales Tax (VAT) and many other types of indirect taxes at state level would be done away with.
After passage of GST Bill in Parliament and getting nod of the President; and also getting ratification of majority of state assemblies, now was the time to finalise the details of GST. The task of finalising these details was given to GST Council. GST Council which consists of representatives from different states and from the union has been constituted and some meeting of GST council has already been held recently. Now what shape GST will take all depends upon the decisions of the GST council.
Equity versus efficiency
By deciding to have four rates of GST, GST Council has actually moved away from the ‘one market one rate’ tax model. With this, stage is now set to tune the system of GST in accordance with these four rates of GST. It may be noted that in the world, except a few European Countries, normally there exists only single rate of GST, as multiplicity of rates tend to increase the complexities in implementation and compliance. Former Finance Secretary and tax expert Vijay Kelkar, who headed 13th Finance Commission, and has been the author of tax reforms in the country, has termed this four tier structure as ‘disappointing’, as it would ‘rob the GST of efficiency enhancing potential’. Single rate according to him is the key to the compliance and also the economic benefits from GST. Multiple rates may lead to rent seeking, reduce Government revenue and create problems in compliance, he says.
Though, from the point of view of efficiency and compliance, it may be advisable to impose a single rate of GST, however, we should not forget that tax is not only a revenue generating instruments, it is also to be used for achieving equity. Imposing same rate of tax on all commodities may involve convenience of compliance; however this is inequitable, as it would mean taxing a bicycle at the same rate as that of a luxury car. Therefore those who argue for single rate, seem to undermine the equity aspect of taxation.
Revenue impact
Whether the new rates so decided would lead to increase in revenue of the union, or GST would be revenue neutral, is not known; however, there is general agreement that states would be net losers initially, for which they would be compensated for five years. Centre’s estimate is that they would be requiring rupees fifty thousand crores in the next five years to compensate states for loss in their revenue. No roadmap is ready as yet, how this amount of compensation, would come from.
Will the GST be anti- inflationary?
In the last GST Council meeting, where the issue of rates of GST was discussed, the Central Government presented its estimates about the likely impact of GST on inflation, on the basis of the first proposal of 6 percent of minimum GST rate and 26 percent of maximum GST rates. When the central government presented its proposal for four-tier rate structure, with minimum 6 percent and maximum 26 percent, at the earlier GST council meeting, it had estimated the inflation impact. The proposal stated that, the overall impact on the consumer price index will be (-)0.6 percent. The break up shows that health services will be costlier by 0.56 percent, fuel and lighting by 0.05 percent, clothing by 0.23 percent. However transport would be cheaper by 0.65 percent, education by 0.08 percent and housing by 0.09 percent. Now since the minimum rate has been reduced to 5 percent and maximum rate increased to 28 percent, the likely impact of GST will have to be re-estimated. However, we must understand that, these are only rough estimates, based on the best expected compliance and efficiency. Whether, we will actually be able to curb inflation is yet not clear. Nevertheless, it is clear those earlier claims of proponents that it would bring a big difference on the inflation front, are nowhere visible. If we are able to make it inflation neutral, it will be a big achievement. Further, the Committee of Secretaries is supposed to classify different commodity for different slabs of GST, final likely impact would be known later.
Last but not the least, there are not many takers of the arguments of the Government, that introduction of GST will boost growth, as the same is not proven, anywhere in the world!
(The author is an Associate Professor, PGDAV College, University of Delhi)
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