Prune list of items in 28% bracket to just a handful
Though there has been no solution as yet to the thorny issue of who is to control which lot of taxpayers, finance minister Arun Jaitley has done well to get all state governments to agree on a broad GST taxation structure, and enough care has been taken to ensure the inflation-impact will be kept to a minimum. With this, India is on its way to become a single market, with uniform tax rates across states and, thanks to 24×7 uploading/matching of invoices of goods moving across states onto a GSTN computer system, state governments can remove most border check-posts quite soon. A single tax rate, suggested by some, would have helped avoid classification disputes but was never going to be possible due to the apprehension of huge revenue losses and the fact that a very large number of items would end up paying higher rates than they do now.
While the eventual aim of GST has to be lowering the number of rates once the system stabilises, the biggest problem right now is that, for too many commodities, the GST rates may not be much lower than the rates being charged right now—in which case, that pretty much defeats the purpose of GST which was, due to increased compliance, to lower the effective tax rate dramatically. Had the GST council taken into account the much higher compliance which will happen once the system stabilises, it could have lowered tax rates quite substantially—you may or may not agree with the chief economic advisor’s estimate that R4.3 lakh crore can be got through increased compliance, but that does indicate there are significant gains to be made.
There is also no clarity on whether services are to be taxed at 12% or 18%, but one way to fix things is to ensure just a handful of goods and services are retained in the 28% tax bracket—in the earlier proposal, where the top tax was 26%, over a fourth of the tax base was to fall in this bucket; if most of these items are shifted to the 18% bucket, the average tax incidence will be lower than what it is today. This is critical since the best chance at getting a low rate-structure is now, when the Centre is compensating states for any revenue loss—there is no guarantee that the GST Council will lower rates a few years down the line even if tax compliance rises. Finance minister Jaitley is obviously right when he says the R50,000 crore cess is better than a R172,000 crore tax—just 29% of any GST tax remains with the Centre—but a better solution would have been to finance the compensation for states through a temporary relaxation of the FRBM limit; this is especially important since the bulk of the R50,000 crore is to come from a clean-energy cess which, because it cannot be set off as input tax credit, will add to production costs.