GST, perceived as ‘one nation, one tax’ by the Modi govt, must evolve gradually with the market

Having one standard rate of 15-16 per cent at which goods and services tax (GST) will be levied is a very ambitious proposal mooted by finance minister Arun Jaitley. It’s doable but not easy given the complicated market mechanism in India with federal character. But, at one level bringing in one standard rate where over 90 percent items are taxed should resolve a lot of complexities in tax mobilisation as well. For the BJP government to finally succumb to rationalisation is being viewed by many as a Congress and Rahul Gandhi victory for he railed and railed against Gabbar Singh Tax.

As Jaitley himself pointed out, subsuming most tax slabs into one rate is fraught with challenges as well. Revenue losses could stare in the face of both the Centre and the states that have been facing increased demand for development expenses. But the recent results in the Hindi Hindu heartland may have convinced the BJP that rural distress, DeMo and GST implementation may have roiled their prospects adversely, hence the correctives.

Even in the prevailing five rate structure, GST revenues have not crossed the stiff target of Rs 100,000 crore per month as initially envisaged. Unless revenue buoyancy was assured, Jaitley may not be able to swiftly ring in one standard GST instead of two slabs hitherto envisioned.

With huge farm loan waiver commitments made by states, it is all the more imperative that GST matrix expands, volume business drives revenues growth. On more than three occasions, GST rates were revised lower to give a big push to consumption growth and drive the revenue mobilisation. These course correctives were responses to people anger primarily. While the mop up doesn’t appear to be stabilising @ Rs 100,000 crore per month remains a concern. And despite that the urgency shown to bring a flat rate tells you that the imperative is here and now.

Reforms in the GST regime cannot be wished away even on revenue considerations. For instance, today only 28 luxury and sin items attract highest tax rate of 28 per cent. Hitherto over 230 items were in higher tax bracket, which was completely untenable.

From central value-added tax (VAT) days when the average impost was about 31 per cent, India has come a long way in tax reforms. Peddlers of gloom never even thought GST could not get off the drawing board and become operative. These pessimists were proved wrong when GST became operative beginning July 2017. But sometimes haste makes waste.

Changes related to rates and its administration had an unsettling impact on the consumers. GST that was perceived as ‘one nation, one tax’ by the Narendra Modi government needs to evolve gradually with the market. Big question was the ideal mean rate at which goods and services may be taxed in India. Globally, the experience has been varied. For instance, the UK has just two rates, 5 per cent and 20 per cent while Singapore adopted 7 per cent across the board.

Back home, the 13th finance commission headed by former revenue secretary Vijay Kelkar had recommended one mean rate of 12 per cent. As chief economic adviser in the finance ministry, Arvind Subramanian had suggested either 15 per cent or 16 per cent. Apart from having a single mean rate, 5 per cent for essential commodities may have to be retained while the luxury items may continue to attract 28 per cent though there’s a case for pruning the list.

Going further, the Modi government may have to draw up a plan for phasing out all kinds of cess on fuel, roads and green initiatives. Though several cess were phased out, some were retained or introduced on revenue considerations. Phasing out cess should become a priority issue in GST reform programme.