Single or multiple rates in GST

My suggestion is that though we need not have a flat rate, we should have rates: 5%,16% and 28% and a few cesses, says Sukumar Mukhopadhyay

The red-hot controversy now is about single or multiple rates in GST. Prime Minister expressed the view that milk and Mercedes cannot attract the same rate and earlier Finance Minister had said that chappals cannot attract the same rate of duty as an air conditioner. They fear that otherwise, the GST will be regressive. Even Arvind Panagaria, the chief economic advisor, has supported multiple rates and cess. So, I am giving my reaction to the controversy of flat rate versus multiple rates.

Here I am propounding that we should have the best of both the worlds by having neither a flat rate nor too many rates. This is not the best, but the best compromise.

International experience

Now let me give you some countries with different rates. Belgium — 21, 12, 6. Brazil — 25, 18, 12, 7. Canada — 5 as central GST; 9.975 at Quebec, but there are 7 different rates as sales tax in different states vary from 13 to 15. China— 17, 11, 6. France — 20, 10, 5.5, 2.1; Germany — 19, 7. Italy — 22, 10, 5, 4. New Zealand — 33, 28, 15, 10.5; Russia — 18, 10. Sweden—25, 12, 6. Switzerland — 7.7, 3.7; the UK — 20, 5. They have got multiple rates and also exemptions. Even those who have a single rate have exemptions. Apart from that, there are exemptions for export which every country has got. Single rates are there in Japan — 8; Australia — 10, Singapore — 7, Denmark — 25 and some African countries. But they are hardly our type of country. In India, we have about 40 per cent people poor who have to be taken into account. The reason why the major economies have applied multiple rates to their VAT (apart from the zero rate) is that multiple rates offer a great opportunity to fit the VAT to various social and political ends. A lower rate is granted to necessities while luxuries are subject to higher or standard rate. Single rate is horizontally equitable but vertically inequitable as rich and poor are put to the same burden of tax.

View of pure economists

Their view is that VAT/ GST is basically a regressive tax like all other indirect taxes. If one tries to make it progressive by giving exemptions and making multiple rates, he will fall in the same old trap of trying to make a dog's tail straight. They argue that exemptions distort the economy and create classification problem. That is the truth, but not the whole truth.

A macroeconomic view

GST is not to be seen in isolation but in combination, that is, as a part of a total tax structure along with (i) cess on luxuries and demerit goods, (ii) income tax and (iii) expenditure policy, including subsidy policy like price support for crop and farm loan waiver. What has to be judged is whether the tax structure as a whole is regressive or not. The combination can be made of the best qualities of all the taxes. The strength of GST is in its ability to raise revenue, that of cess is also in garnering revenue, of income tax is in attaining progressivity and of expenditure policy is in effectuating a pro-poor direct redistribution of income and consumption opportunity. A combination will make a strong tax structure, which will serve the welfare purpose more than a messed-up GST by multi-rated distortion. So, GST may well be regressive in the usual sense, but it need not be regressive in combination with other taxes.

Conclusion

So, my suggestion is that though we need not have a flat rate, we should have rates: 5, 16 and 28 per cent and a few cesses. Now that the GST Council has finalised the rates as 5, 12, 18, 28 per cent and cess, there will be enough controversy about classification due to two rates 12 and 18 where there will be most controversies. So, if these two rates are merged into 16, there will be no controversy. If items under 5 and 28 are listed and the rest all fall under 16, the big fat excise tariff will be redundant. So, we have three rates, 5 per cent for common man’s goods, 16 per cent for middle-class men’s goods and 28 per cent for richer class’ goods. In the language of economics, basic goods 5 per cent; consumer goods 16 per cent and goods for conspicuous consumption 28 per cent and cess extra for sin goods and luxury goods. This will combine the best of both the worlds.

The writer is retired member of the Central Board of Excise & Customs

E-mail: smukher2000@yahoo.com