Given the way the GST rates, including the cesses on various goods and services, were calculated, the effective duty rate on bigger cars and SUVs fell from 52-55% in the excise-cum-VAT days to 43% under GST while that on hybrid vehicles above 4 metres in length rose from around 30% to 43%—to that extent, if the government policy is to encourage the use of hybrid vehicles, this needed to be fixed. This has now been addressed with the GST Council agreeing to hike the cesses on bigger cars/SUVs to keep the GST rates on them at the 52-55% levels, thus restoring the edge hybrid vehicles had in terms of tax rates. The actual duty change will, though, require an amendment in the law on cesses, and that may or may not happen in this session of Parliament. When a similar anomaly had seen duty rates on cigarettes come down dramatically post-GST, the GST Council was quick to hike rates and, in the bargain, provided around `5,000 crore extra in the cess account to compensate states in case there is a fall in their revenues after the implementation of GST.
Given GST is a brand-new tax, such anomalies are bound to creep in, and so it is important that the GST Council be quick and flexible about the necessary changes in tax rates. The fact that all decisions of the Council have been unanimous and not by majority also means that both the Centre and all the states are on the same page when it comes to what needs to be done on GST. This, however, is a double-edged sword and needs to be used carefully. If the GST Council is going to be changing rates as frequently as it has, this will encourage those taxed to constantly lobby for changes, whereas a large part of GST’s USP is the stability in rates.
More important, it has to be kept in mind the eventual goal of GST is to have a smaller number of rates—it is in this spirit that finance minister Arun Jaitley told Parliament the other day that there was, over a period of time, scope to merge the 12% and 18% GST rates. Since any such merger of tax rates means one set of goods and services will see their rates go up, and another will see them going down, the mechanical fitment exercise being used right now—to ensure that the effective tax rate does not go up/down by too much—will not allow this to happen. In which case, the GST Council would do well to relook this model.
The bad news, at least for now, is that the GST Council is unlikely to appreciate this—indeed, the reason why it is so keen on pushing for the anti-profiteering authority is that it does not trust producers to pass on duty benefits to consumers. GST is a fundamentally different way of taxing goods and services, and its strength lies in it being simple with as few rates as possible—reducing it to a system in which rich-people’s-goods are taxed at a higher rate than poor-people’s-goods is a bad idea.