Though a final consensus on the tax rates on various items has been left to next month’s deliberations, it would appear the centre and the states are veering around to a fairly high GST rate which, in itself, will take away from the benefits of the GST.
A fourth of the tax base of Rs 51 lakh crore, for instance, is to be taxed at 26 per cent, on top of which there will also be a surcharge on certain demerit/sin goods – that this list (based on a tentative list given to state finance ministers) includes not just cars, but even soaps, mosquito coils and biscuits is certain to make things more difficult for the middle classes.
Another third of the consumption base is to be taxed at 18 per cent which is a significant hike since close to two thirds of this is services which are taxed at a lower rate today.
While the idea of imposing a cess instead of a higher tax on certain goods is a good one since a cess does not have to be shared with the states as per the finance commission’s revenue-sharing formula – this way, the centre can use all the cess collections to compensate the states – it is a significant step-up in the rate.
At the estimated collection of Rs 50,000 crore from this, it adds up to a whopping one percentage point in the average rate.
All of which suggests the revenue department has not bought the chief economic advisor’s (CEA) view that the compensation amount should not be added on to the GST rate but should be found from within the budget.
It also means the revenue department does not buy the CEA’s argument that a lower rate in a GST framework will, in itself, lead to more compliance which will result in more taxes for the centre, from which the states can be given their compensation.
What makes this all the more unfortunate is that once the thorny issue of how the compensation was to be calculated was resolved on Tuesday, the states would have agreed to a lower set of rates.
Though a multiplicity of rates was to be expected, too many rates will make compliance difficult and will also lead to corruption since it gives more power to the taxman.
For instance, several spices – based on the initial lists circulated – are to be taxed at a 6 per cent rate but if they are sold as mixtures, they are to be taxed at 12%; some food items are to be exempt while others are to be taxed at 6 per cent.
Indeed, one of the reasons for the GST rates going up is the fact that half the taxable base is not to be taxed – if half the base is not to be taxed at all, it means the other half has to be taxed at double the normal rate.
Which is why, as Vijay Kelkar, Satya Poddar and Bhaskar have argued in an article in Mint, the government could have protected the bottom of the pyramid consumers by, say a Rs 2,000 per annum direct benefit transfer – to offset the higher tax on items they consumed – and then managed to get a much larger tax base which, in turn, would lower the effective GST rate.
That is still something that is worth fighting for since, once the GST rate is frozen, it will be difficult to lower it, and the benefits of compliance will become that much more elusive.