GSTs Tax bands : Good or Bad?

This debate between @BwoyBlunder and @DeepakShenoy on Twitter prompted me to jot down this short note on the efficacy of GST and whether multiple bands of tax rates violate the principles of a nationwide goods and services tax.

The proposed GST regulations envisaged a four tier rate of taxation

·         Merit rate for essential goods and services
·         Standard rate for goods and services
·         Special rate for precious metals
·         NIL rate
·          
But as it appears from the GST council meetings that ended on the 19th of October, we may have instead a five tier rate as follows:

·         Merit rate at 6%
·         FMCG products and non-essential food items etc. 12%
·          Standard rate for goods and services 18%
·         Luxury goods 26%
·         Nil rate

In essence the GST is based on the one nation one tax rate principle, does that mean there should only be one singular rate across different categories of goods and services? 
In the current environment where VAT is applicable there exist a multitude of bands for goods taxable regime. The rate of tax that each product is subjected to depends upon a number of factors including but not limited to
·         Economic utility,
·         Sector significance,
·         Progressive principles of taxation and not to forget the main aim
·         Maximizing revenue collection for the government. 

In this light to be able to impose a single broad rate on all categories would surely have adverse consequences. Imagine the prices of commodities in the 5% VAT bracket after being subjected to GST at the rate of 19% instead. There will be an unfavorable impact on retail consumers and evasion may increase across board. The government and successive reports have all argued against a regime saddled with umpteen exemptions and abatements since it introduces administrative challenges at multiple levels.

This is where multiple bands step in, however does having multiple bands across products undermine the one nation one rate principle?

Not in my opinion, to make trading and compliance easier it is important that the rate on a particular good or service be equal across states. The presence of multiple rates slabs does not violate this tenet and still allows for a uniform progressive rate across the country. The essential aims as far as the GST is concerned are two fold
1)      To create one common market across India and
2)      To remove the cascading effect of indirect taxes.

The proposed structure of GST succeeds on both counts with or without the banded approach to tax rates.

Even with the banded approach, it makes little difference from an end consumer or even the manufacturer/dealer/service provider if there exist more than one band as long as they are able to utilize input credits and avail refunds in the case of inverted duty structures.

In the illustration in the end is perhaps a decent exhibit for why we need to perhaps have differential rates to ensure parity and equitable distribution of the tax burden.


Comments

  1. Thanks for the article! While I think the approach is interesting, the concept of indirect taxes is regressive by nature. How can it be progressive? By imagining that certain things are only used by the rich. Like cars. But cars are used by the poor too. They now have the ability to use the Ubers and Olas, and making cars more expensive hurts them, and then they have aspirations too - so by keeping car rates high, we are denying them the jump to a better land.

    The corruption is introduced when someone gets to decide that some item is "luxury" so you cannot give it a low tax rate. And then, a loose definition of that item - like a car that is 4m or less, or a restaurant that has A/C - will cause corruption because randomly tax officers can say there is an ac in manager's cabin so it's an A/C restaurant etc. And it's so arbitrary to tax a/c restaurants higher, when we should aspire really that all places should be offering A/c to everyone. This arbitrariness causes idiocy in tax codes, and create layers where it is unnecessary.

    On the lower end can we raise rates of everything? The answer is possibly yes in many cases because it keeps happening anyway. If you want a transition time to do so then yes, you might slab it for a couple years and then move to a single rate - but the single rate offers a massive advantage in that it's all you need, and compliance is much easier, and calculation is much easier, and all that.

    The other way is to provide a subsidy, a direct transfer, or such. This can be done in extreme cases like in processed salt, in certain medicines, or a combination.

    While I think everyone is ok with, in principle, three rates (some stuff is exempt, some stuff is taxed to hell and back like cigarettes which no one cares about, and the third being the GST rate) I think putting six or seven rates plus a cess is insanity. (There's exempt, taxed-like-hell, four separate slabs and a cess under discussion)

    And this is nothing, there is also state level taxes. Which can put stuff in different slabs. And that can get ludicrously complex. (this is going to happen anyhow)

    I have an issue with any inverted slab structure and refunds - because this is where a huge amount of damage is caused and keeps things in abeyance for very long. See IT cos refund of ST, or other inverted tax issues that reflect in company disclosures.

    Overall, I continue to believe it's very good to have one main rate. Anything that's not in that rate should either be exempt, or taxed like hell. That would save us a lot of trouble, honestly. But I doubt this is acceptable to the many authorities that get to decide on it.

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