A few days back, union finance minister and chairman, GST [Goods and Services Tax] Council – all powerful constitutional body set up under the constitution amendment Act to determine the tax structure and the rates under the Act – Arun Jaitely was confronted with a question as to why we cannot have one or two rates in consonance with the global practice.
Jaitely’s answer was that for India with wide disparities in incomes and majority of people living below the poverty line, ‘the tax on an item like chappal/footwear [mostly used by the poor] cannot be the same as on a luxury car which is invariably the privilege of a rich person’. Yet, he did not rule out the possibility of moving to the desired goal in future.
The argument suffers from an inherent contradiction and is self-defeating. If, in view of the reasons cited, one or two rates is not possible today then, how will it be possible in the future? Will those reasons cease to exist say, 5 years from now?
Jaitely is well aware that income disparities and poverty won’t go away though under Modi – government [given its huge pro-poor bias in formulation of policies, development plans and welfare schemes] one can look forward to some reduction. The real reason for putting together a GST architecture that is far removed from an ideal stuff is the compulsions of a federal polity.
Be it in the empowered group of finance ministers which discussed the contours of the constitution amendment bill or GST Council mandated to carve out the fine details, Jaitely has been ever keen to take all states on board. He has accommodated most of their demands and ended up with a tax structure that is a mere rehash of the subsisting dispensation. There are 5 broad rate categories viz. zero, 5%, 12%, 18%, 28% besides a number of cesses imposed on demerit items falling in highest slab 28%. The ball does not stop here.
For any given item, the applicable rate varies depending on its value. For instance, a footwear valuing less than Rs 500/- attracts 5% GST whereas the same item costing more than this amount will attract 18%. Likewise, apparel costing less than Rs 1000/- attracts 5% whereas for purchase above this threshold, the customer will pay 18%. Then, there are a host of other distinctions such as branded versus unbranded food; AC versus non-AC restaurants; economy versus executive class etc. The rate will be different depending on the class.
Such a highly differentiated tax structure gives too much discretion to the bureaucrats. In such a regime, corruption and nepotism is inevitable even as business entities lobby to get product of their interest included in the low rate category. This is out of sync with Modi’s philosophy of zero tolerance for corruption.
The desire to take all decisions by consensus and take every state on board [rendering even the voting clause redundant] has also led to a host of other collateral damages. Thus, union government has acceded to granting states full compensation for the loss of revenue vis-à-vis what they would be getting under extant dispensation. Such a demand shows lack of faith in the capability of new regime to deliver. What makes things worse is levy of a cess on demerit items [those attracting 28%]. This could have been avoided if there was no obligation on union government to compensate the states.
FM has also alluded to considering changes in the tax rates, classification or any other issues that are brought to its attention or even suo motu. While, there can be no disagreement on addressing implementation issues, it would be inappropriate for the body to alter the rate structure or classification of items. Doing so amounts to injecting an element of ‘unpredictability’ and ‘instability’ in the system.
For instance, in respect of SUVs [sports utility vehicle] initially it decided to levy cess @15% which together with basic rate of 28% adds up to an effective rate of 43%. Now, it has mooted increase in the cess to 25% which translates to effective rate of 53%. This has caused consternation among the makers of SUVs [mostly MNCs] who have termed it – rightly so – as retrograde step. Some have gone a step ahead to revise their plans for investment in India.
Ironically, the Council has not addressed anomalies that had crept in the GST architecture in the very first place. Thus, it had ‘virtually’ excluded crude, gas, petrol and diesel [included but keeping them zero rated]. This meant that even as oil and gas companies continue to charge excise duty and VAT – plus other local levies under existing dispensation – they won’t get credit for duty paid on purchase of their inputs including equipment, machinery etc. This goes against the very philosophy of GST requiring seamless input credit chain.
The uncovered input tax credit would result in a staggering loss [estimated to be about Rs 25,000 crores] to Oil and Natural Gas Corporation [ONGC], Oil India Limited [OIL], Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL] etc. These undertakings being the lifeline of the economy, the government cannot simply afford their getting hemorrhaged.
Following representation from these oil PSUs, Jaitely had promised to take up inclusion of gas ‘only’ [others viz. crude, diesel and petrol are not even on his radar]. Even this has not happened so far.
Electricity is also excluded from ambit of GST. Consequently, generation and distribution companies won’t get credit for taxes paid on inputs used by them. The excise duty or state VAT paid on gas that goes in to electricity generation as also tax paid on equipment and stores get embedded in the cost of the end product [read: electricity]. This anomaly needs to be urgently removed; yet, the Council seems to be in no mood to take it forward.
The Council should stop fiddling with GST architecture forthwith. Instead, it needs to focus on removing anomalies such as exclusion of oil and gas products, electricity, alcohol and real estate. Going forward, it should aim at a 3-tier structure – as recommended by Dr Arvind Subramanian committee – in the interim and a single GST in the long-run.