Introducing flaws

The provision enabling a higher peak GST rate is of concern

There was much to cheer as the Goods and Services Tax (GST) Council wrapped up its originally scheduled two-day meeting on the first day itself. The council approved two crucial Bills, the Central GST and the Integrated GST, and also approved the division of administrative turf between the Centre and the states for IGST. Another Bill, the Union Territory GST Bill, will be taken up at the next meeting on March 16. The CGST and IGST will now be introduced in Parliament during the second half of the Budget session and their passage will pave the way for a July roll-out of the much-delayed indirect tax reform. The focus now shifts to the tax rates under GST. However, in contrast to the progress on other fronts, the verdict on this count is sobering. 

The council has agreed to put in an enabling provision in the draft model GST law to cap the peak rate at 40 per cent from the earlier agreed upon rate of 28 per cent. Though the capping of the peak rate at a higher level will not change the multi-slab rate structure of 5, 12, 18 and 28 per cent agreed upon last year, it will provide space to both central and state governments to increase the SGST and CGST rates at a later stage without parliamentary approval. Needless to say, this enabling provision is disappointing. Tax experts and the industry would be justified in being concerned about the possibility of an abrupt and sudden change in tax rates in the future. This goes against the principles of sound taxation. It also undermines the raison d’être for shifting to a GST regime. The idea was to have a setup where there was a single rate for indirect tax, both for goods and services. This way, tax administration would have been easy, the tax base would have been bigger, and the resultant tax rate could be low while the revenue would have been higher. 

However, not only do we now have multiple tax brackets, which by itself will lead to a lot of lobbying since goods and service providers will also want their offering to fall into a smaller tax bracket, there is also the possibility now that taxes may go up within a bracket itself. Evidently, the latter will only make matters worse. The decision-makers across the central and state governments must realise that the benefits that were supposed to accrue to the economy as a result of shifting to the GST will materialise only when the tax rates are low, or at least moderate, and the tax administration is transparent and predictable. A system that allows the taxman greater discretion will be more susceptible to being gamed, leading to smaller revenues for the government. To be sure, tax rates are not the only area where the taxman has too much say. The “anti-profiteering” measure, which has been proposed to ensure that trade and industry pass on the benefits of reduction in tax rates to consumers, is a good example of policymakers introducing elements that are problematic both conceptually and operationally.