Friday, Sep 22, 2017 | Last Update : 03:35 PM IST

Fixing GST slabs: Will the rich or poor be hit?

The writer is a Mumbai-based freelance journalist
Published : Apr 14, 2017, 2:13 am IST
Updated : Apr 14, 2017, 2:13 am IST

There are indications that this high slab will be used for the bulk of consumer goods.

The GST, in contrast, has been more problematic, and in the few countries it has been tried it has often led to inflation and job disruption besides hitting the poor.
 The GST, in contrast, has been more problematic, and in the few countries it has been tried it has often led to inflation and job disruption besides hitting the poor.

After the constitutional amendment necessary to make the goods and services tax (GST) into a law and the four acts that were passed last week the fight to establish a new tax regime under GST has yet to enter the most crucial stage. This will happen when the Centre and the states go about fixing the tax rates that will be apply to the range of manufactured goods and delivered services at each point of sale. This will be the sticking point that will determine the possible level of agreement between the states and the Centre, whether the proposals favour the rich or the poor, or if the tax base of the government is increased and at whose cost.

Arvind Subramaniam, the chief economic adviser to the Government of India, in an article explaining GST, observed that the “GST has entered its last and critical phase” and “now is the moment of truth when items will be assigned to the different GST slabs and the exact amounts of the cesses will be decided”. He had earlier referred to the GST as “fiendishly, mind-bogglingly complex to administer”, but also called it a “game-changing reform”.

P. Chidambaram, former finance minister, said in an interview that “this is not a one-rate bill. There are multiple rates that will eventually require to be converged from five to three, to finally one.” Currently five slabs are proposed — 0 per cent (the exempted category), 5, 12, 18 and 28 per cent. Most goods are currently taxed at much lower than the highest GST slab.

There are indications that this high slab will be used for the bulk of consumer goods. As a rule of thumb, if the 28 per cent slab contains items that comprise more than say five to seven per cent of the value of all GST taxable products, India will be seen as a high tax country and compliance will be difficult to enforce and resistance to the new system would increase.

The four laws that gave the GST substance required a constitutional amendment as the new system changed the tax structure defining the relative tax powers of the Centre and the states, the distribution of centrally mobilised taxes between the two and the distribution of the states’ share among them.

It has been a rocky journey with many in the Opposition questioning its many proposals like the sharing the right to administer the law.

The Narendra Modi government contends that it will mean “one country, one market”, as it will unify tax rates across the country, push up the GDP by one to two percentage points, make goods made in the northern states more competitive than in the southern states than imports from Southeast Asia, the needless fragmentation of supply chains be minimised and generally lead to greater efficiencies in the economy. It will also take away powers to tax from the states to the Centre in a federal country, and the loss of revenue this would entail would mean that states would have to be compensated for five years.

After the demonetisation of high-value currency notes last November, West Bengal finance minister Amit Mitra said the introduction of the GST would put a burden on state economies and with demonetisation India’s federal structure may not be prepared for a “double whammy”, as implementation of the GST could further hurt state finances.

There is also no clear policy to tax luxury goods such as gold and jewellery, or expensive cars at a higher rate to curb consumption. At the moment, gold is taxed at only two per cent on imports of roughly $20 billion. Gold and jewellery being luxury items of conspicuous consumption, the total tax on them should be raised to a minimum of 18 per cent, despite the canards being spread that it would only increase smuggling. Good governance would require that the government come down heavily on any possible increase in smuggling so that the annual consumption of gold is fully taxed.

Unless this is done, the pro-rich nature of the taxes is bound to be noted. Also, petroleum products, alcoholic beverages and tobacco have been kept outside GST to be taxed separately by the state and Central governments. Duties on petroleum are the main sources of government revenue. By keeping them outside the GST system, where the tax is fixed, is a way for the Central government to keep revenue constant by keeping taxes inversely proportional to oil prices. For the state governments, taxes on liquor and tobacco are often a source of corruption as the state excise is often removed at the time of elections to help barons fund elections.

Indirect taxes are regressive because they are based not on income or wealth but on consumption.

In a country where nearly 70 per cent of the GDP is from services, the axe is likely to fall more on the poor as they largely don’t pay taxes on the services they consume. Unless the GST is linked to protecting the consumption basket of the poor, while imposing a greater burden where consumption is disproportionately by the rich, it will be a regressive tax. All this will only be known once the slabs are fixed for all the items.

Being a variation of the value added tax (VAT), which was already prevalent, there seems to be little reason to introduce the more complicated and disruptive GST. Like the GST, VAT does away with cascading taxes, which push up prices, is easier to implement and has been used in several countries.

The GST, in contrast, has been more problematic, and in the few countries it has been tried it has often led to inflation and job disruption besides hitting the poor. Also, by taxing services equally with manufacturing, it attempts to bring in new people, mainly the poor, into the indirect tax net.

Tags: gst, modi government, centre, arvind subramaniam