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EDITORIAL

India gears up to ring in the biggest tax reform after Independence
Article Date: 
May 19 2017, 2234

It’s a good beginning. The nationwide consensus on goods and services tax (GST) rates across 1,211 product lines and services in four tariff bands, are the first steps towards achieving, ‘one nation, one market and one tax’. Though there’s a lot of ground that needs to be covered before GST is ushered in on July 1, the nation seems gearing up to ring in the biggest tax reform in India post-Independence.
June 3 could perhaps be the day when finance minister Arun Jaitley would hold the penultimate meeting of GST Council ahead of the single levy rollout. Well, anxiety amongst businesses, individuals and service providers’ in the transit phase is evident. This is understandable as well, given that India would move into un-chartered territory from a taxation perspective. Even tax authorities are bound to spend sleepless nights in the first two quarters after the GST rollout to oversee smooth transition from multiple, diverse and cascading taxes prevalent today.
European Union is the only comparable territory, where the products and services mix is as diverse or complex as India. Twenty-nine states and seven Union Territories ringing in the GST after a 13-year lag, is definitely a moment to celebrate. Before going into the details of what would become expensive or cheap after GST becomes operable, the bigger issue is that the taxation landscape would change for the better. But, one must also admit that the four-band GST rates needs a significant overhaul over the next two years by further moving to just two mean rates of 12 and 18 per cent. While most products and services fall in this bracket, there’s a case for scaling down the 28 per cent rate progressively before the final phase out. Eliminating all exemptions and cess will have to be attempted with a time-bound roadmap.
When it comes to specific rates on products and services, there’s no escape for the four-rate structure with states virtually giving up on their unilateral authority to levy taxes. Given that India is a ‘welfare state’ exemption of daily use items like dal, rice, education and healthcare services from GST imposts is a significant step. It is also true that 28 per cent and 15 per cent cess on sin-goods and services taken together could be one of the highest in the world. Since, input tax credits is the way on which GST works, the impact may not be felt even by high-end consumers.
However, the rationale behind such a high tax rate on luxury items and services consumption is that those who can afford must pay to cross-subsidise the daily need items of the underprivileged. One significant feature of GST rates finalised by the council is that it is by and large ‘revenue neutral’ to start with, leaving very little room for fueling big time inflation.

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