Are the GST tax slabs logical?

This week, once again, indirect taxes were lowered on some items. This usually happens because of three reasons. First, that certain things are politically sensitive, like khakra in Gujarat, which can attract negative headlines. Second, because the government feels that having become more expensive, these items will decline in sales and affect the economy. And third that it is felt that the items were wrongly classified in the first place. All indirect taxes are bad because they tax rich and poor alike. My driver and I pay the same tax for Coca Cola. It is on the issue of direct taxes, like income tax, where the state must be effective.

The Goods and Services Tax has seven slabs: 0 per cent, 0.25 per cent, 3 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent. The rate at which things are taxed is decided by the GST Council, which has representation from the Union government and the states. Usually it is the state finance minister but not always. Karnataka, for example, is represented by agriculture minister Krishna Byre Gowda.

The interesting thing to me is to see what items are at 0 per cent and what ones at 28 per cent and why. Till Friday, there were 227 items in the 28 per cent slab. This started with chewing gum and ended with vacuum flasks and mannequins used by shops to display clothes.

After a meeting of the GST Council, there will apparently only be 50 items on the list. How does the council decide which things we should pay most tax for? The government decides this on the basis of a subjective reasoning. It identifies things as being either “sinful” goods or demerit goods.

Announcing a reduction in the list of these goods, Bihar’s deputy chief minister Sushil Modi said that chewing gum, chocolates, shaving materials and washing powder would be among the items that would be moved from 28 per cent to 18 per cent. He said that in the council there was “unanimity that only sin and demerit goods remain in the 28 per cent category”. The interesting question is what the Indian state and its politicians consider to be a sin or a demerit good.

First, we should start by acknowledging that the concept of “sin” as it exists in the Christian tradition does not feature in the Hindu faith. In the Bible the sin is a crime against God. For example, the original sin of Christianity is Adam and Eve’s decision to disobey God and eat the fruit which made them sexually aware.

The sins of Christianity include sloth and lust, which are natural feelings, for which God will judge Christians. We do not have this concept. But let us understand sin from its common meaning of something that is, or is seen to be, immoral or encouraging immorality. Such as alcohol.

Alcohol is of course not on the GST list at all and states can tax it at the rates they choose (and some states like Gujarat do not tax it at all because officially no alcohol is sold in Gujarat to ordinary people. Unofficially it is a different story). The strange thing is, that it can be cheaper because of that fact.

One could have a meal and a drink at restaurant in Mumbai and pay 18 per cent for the food but only 10 per cent (the Value Added Tax) on the alcohol. One should not complain much about this but it is a pointer to an imperfect system.

The issue of the demerit good is more complex. This is a product or service whose consumption is considered socially undesirable. Of course alcohol is part of this, but so is tobacco and, specially in recent times, junk food. This is why we should take a look at the list of sinful and demerit goods.

It includes paints (to colour your homes and offices), but also paints for artists and shoe polish (a product bought and used by some of the poorest street workers). Why punish such people? It is difficult to imagine on what basis these are either sinful or demerit.

And then fireworks, which are in any case expensive and out of the reach of the poor, are on the list but also fire extinguishers. This I found to be astonishing. In a nation where safety standards are the lowest in the world, why make compliance expensive?

Yachts and personal aircraft are taxed at the same rate, 28 per cent, as motorcyles and cars. I can imagine cars being seen in a poor nation as a luxury. But motorcycles? What aspect of owning a two-wheeler is sinful or demerit? Tyres also attract the same high tax, meaning that for the individual replacing his SUV’s tyre pays the same rate of tax as the cyclist.

Air conditioners, fridges, washing machines and water heaters have all come in this category also. Again, it can be argued that in a country like ours these are luxuries. But the larger issue is that there is no application of mind. Pan masala is at 28 per cent but paan, meaning the betel leaf, is at 0 per cent. Surely both encourage the same habit so it is unclear why pan masala is a demerit good.

I would encourage readers to have a full look at the slabs (available online on the government websites like cbec.gov.in) to decide for themselves if the GST tax brackets are logical.

The point is not to blame this government. All state governments, including the Opposition-run ones, are a part of the GST Council. The point is whether the citizen is taken casually when the matter of “sin” and “demerit” is defined by people without any debate. I should finish by saying that for the money made by columnists and independent journalists, there is no GST.