Has GST Moved in the Wrong Direction?

Tue, 8 Nov Pre-Open

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What is the simplest way a layman understands Goods and Service Tax (GST)? The answer to that is 'one nation one tax'.

One tax essentially means that there is one standard rate of tax which applies to all goods and services in the country with the exception of certain items such as sin goods and essential commodities. This essentially means that whether you manufacture a car or a refrigerator, provide consultancy in relation to taxation or legal matters- the amount of tax to be levied is the one standard rate of tax as decided under GST. The main advantage of GST is its simplicity as there is one standard tax rate and it subsumes all indirect taxes under one roof.

However, the government is complicating the very basics of the concept of GST by implementing a multi-tiered tax rate system. Here are the agreed upon tax slabs under GST.

50% of the items present in the consumer price index (CPI) basket, including food grains such as rice and wheat will attract zero tax rate.

The next slab will be 5%, wherein items of mass consumption like spices, tea and mustard oil will be taxed. Next will be two standard rates of 12% and 18% wherein a majority of items used by the common man will be taxed.

After that, there would be a higher slab of 28% where items currently attracting a tax of 27-31% will be taxed. Items like white goods and cars will be included in this tax bracket.

Now, the so called demerit and sin goods such as aerated drinks, luxury cars, tobacco and pan masala will also be taxed at 28%. However, on such goods a cess will be levied by the Centre over and above the 28% slab.

The only people who benefit from this multi-tiered tax system are bureaucrats. As rightly pointed out by an article in Mint, the multi-tiered tax system lead to private companies having an incentive to go to New Delhi and press for their products to be shifted to a lower tax slab. It's an open invitation to producers and traders associations to lobby bureaucrats. The government's own chief economic advisor had produced a report earlier arguing just for two rates, with a maximum of 18%. This is also close to the best practices worldwide.

with this move, the government could have possibly moved in a wrong direction which would increase paperwork as well as litigations pertaining to classification of goods. Moreover, it could also complex things and will no longer be any more simplistic than the current prevailing laws pertaining to indirect taxation. As rightly pointed by an expert the law could possibly be a name changer rather than a game changer.

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