Six rates of taxation make GST a very complex reform

New Delhi: In a historic move, India rolled out the goods and services tax (GST) on Friday midnight. This came after 17 years of gruelling negotiations between political parties and intense haggling by states and industry.

However, the Indian GST is far from perfect and much more complex than what other countries have adopted. Most of the countries have a single rate GST. In contrast, the Indian GST has six rates of taxation — 0, 3%, 5%, 12%, 18%, 28% and 28% plus cess.

Moreover, in India both the Centre and states will collect GST unlike other countries where this power is vested in a single authority.

Anyway, a third of items, including high revenue-generating petrol, diesel, natural gas and electricity, are outside the GST ambit. Industries that use these products as inputs will not be able to claim credit.

Liquor too has been excluded from GST. Real estate has been brought under the new tax regime only partially. Sale of property will continue to attract stamp duty as before.

Revenue secretary Hasmukh Adhia summed up the government’s dilemma over GST when he recently said: “We will prefer to have a single GST rate but after some time. That should be the ultimate goal.” However, it looks unlikely that states will agree on bringing excluded items under GST anytime soon given that the target remains elusive even after 17 years of negotiations.

Experts say that compliance with the GST would be costly and tedious because of its complexity. Small businesses with limited computer literacy, erratic power supply and poor net connectivity could find themselves struggling for survival under the new tax regime, experts have cautioned.

The government’s claim that the GST will help curb tax evasion is more myth than reality, say experts. Business with less than `20 lakh annual turnover are exempted from GST, a provision that experts fear can be misused by businesses to create dummy small companies for enjoying tax exemption benefits.

The design of the final GST is much different from what the 13th Finance Commission had suggested. For one, the commission had recommended a single rate for GST (7 per cent for states and 5 per cent for the centre).

The commission had strongly pitched for keeping GST simple, saying, ““A single rate across all goods and services will eliminate classification disputes and make tax assessment more predictable.”

Chief economic adviser Arvind Subramanian had recommended a single revenue neutral rate of 15 per cent for GST. But this could not be implemented as states refused to come on board despite Centre’s assurance to compensate their losses.

The panel had also strongly recommended for bringing under GST petroleum products, electricity, stamp duty, taxes on vehicles. But the government has defended multi-tiered GST, saying it  will be helpful in reining in price rise while keeping prices of essential commodities under check by placing it in the lower tax rate.

Taxes & duties continue under GST

• Customs Duty
• Property Tax
• Stamp Duty

Outside GST purview

• Alcohol for human consumption
• Petroleum products such as crude oil, petrol, diesel, aviation turbine fuel and natural gas
• Electricity