Of course, we need to be excited about fewer rates, and lower prices. The proposed two-slab structure, plus the sinful tax one, of the Goods and Services Tax (GST) is a giant step forward in tax reforms. According to estimates, 175 items may get cheaper, although one will need to wait for the final notification, and look at the fine print. There will be ease of doing business for the manufacturers and traders, which too is a laudable achievement. However, there is more to GST than slabs and rates. What India needs is a new mindset, a new gait, i.e., to walk the talk.
For instance, if the slabs of five per cent and 18 per cent, along with a much-higher one for a few sinful items like liquor and tobacco, come into play, it will mean a wide gap between the first two rates. There will be opportunities for foul play, and misclassification to pay a lower rate, instead of the higher one. Disputes with the tax authorities are likely to rise. Misclassification was one of the major problem areas ever since GST was enacted. Lakhs of crores of rupees are caught up in legal cases, with the GST officials claiming illegalities, and the traders justifying it with technicalities.
The confusion and chaos are likely to remain the same, or even go up, as a 13 per cent gap is lucrative enough for businesses. According to experts, this may increase, rather than decrease, the problems related to input tax credit. Input tax is the mechanism to refund manufacturers for taxes paid on inputs, and save them from dual taxation. For example, if one buys five inputs, on which five per cent GST each is paid, the buyer needs to recover the amounts, and pay the requisite GST on the final product. This was one of the most contentious issues in GST. The wide gap will not lead to solutions.
Experts argue that what the country needs is a single slab, a single tax so that there is no room for illegalities and irregularities. In the earlier several-slab regime, the average GST was 11-12 per cent. The two-slab structure, say tax experts, will reduce the average to below 10 per cent. If this is the case, a one-slab GST of 10 per cent will protect Government revenues under the proposed regime, and remove every confusion that exists. It will be simpler and easier. Yes, of course, some sectors will get hit in the medium term. But the same will happen for many sectors that will remain in the 18 per cent slab.
There is now talk that to force sellers to pass on the GST benefits under the new structure to the customers, the Government may invoke anti-profiteering rules. This is a case of going back to the socialist era, which the country left behind more than three decades ago. It is not a case of GST 2.0, or second-generation reforms, but GST 0.0, or no-generation reforms. It is the ease of not doing business. The Government cannot force companies to lower prices, unless the former can build a case of excessive profiteering. Obviously, in such cases, the punishment for firms needs to be the maximum.
More importantly, the two-slab structure will lead to lobbying and corporate pressures. It existed earlier, and is unlikely to vanish. But now, as is evident from media reports, each sector and segment will push the government to put its products in the lower slab. Yet again, the problem is the gap between five per cent and 18 per cent. Recently, the Indian Beverage Association argued that the current tax of 40 per cent (28 per cent GST plus 12 per cent compensation cess) needs to be reduced to 18 per cent. Carbonated beverages cannot be deemed to be ‘sin or demerit’ goods. Remember, the sin tax under the new structure may be 40 per cent, plus other taxes.
Invariably, there is national interest involved in lowering taxes. The association explained that the industry hopes to create three million new jobs by 2030, and commit an additional investment of `85,000 crore by the same year. This will increase the income and profitability of the neighbourhood traders, “along with the dependent ecosystem and secure their livelihoods so that they are able to survive the onslaught of quick and e-commerce.” Some sections have voiced the idea of sugar-based taxation, based on how much sugar the beverages contain, which will provide relief to fruit-based juices.
Now, let us look at the revenue side. Most experts feel that since its genesis, GST was seen in India as a revenue maximisation mechanism, but was shrouded in rhetoric such as simplicity, ease, transparency and morality. The fact that earlier we had so many slabs indicated that revenue was the underlying concern. In fact, many states refused to come on board because they felt that they would lose out in the revenue distribution mechanism. But taxes and GST, apart from special situations, cannot be judged on collections. The collections need to improve over time because of the other factors.
This time too, as we move to a two-slab structure, some states are angry about the possibility of lower revenues. At present, these include the Congress-ruled ones, since the BJP-ruled ones are in sync with the central regime. One estimate shows that if the items that currently attract 12 per cent move to the five per cent bracket, the annual revenue loss will be `80,000 crore. It is a huge amount, but peanuts compared to annual GST collections. In August this year, the GST revenues were `1,86,000 crore. This is just in one month. Even meagre increases in volumes will make up for the `80,000 crore dent. There is a need to look beyond revenues. The country needs to look at the economy, not just economics.
One year after GST, the then finance minister, Arun Jaitley, who pushed through GST, was harping on revenues. “The system of input tax credit ensures that disclosures are made. The GST has encouraged enormous voluntary tax registration. Detailed calculations… show that… about 1.7 million registrants were those who fell below the GST threshold but nevertheless chose to be part of the GST.” He was, of course, talking about the additional people and firms that were likely to pay GST to boost revenues.