Rahul Gandhi’s Single-Rate GST Promise Is Daft; Jaitley Should Finally Settle For Three Rates

After the Goods and Services Tax (GST) Council trimmed the highest 28 per cent tax bracket giving a significant tax cut of 10 per cent on as many as 178 items by shifting them to 18 per cent slab, Congress party vice-president Rahul Gandhi said, "We are not happy. We want the 'Gabbar Singh Tax' to be abolished and people get one tax slab of GST. We want only one 18 per cent tax slab. If BJP does not do it we will do it in 2019.”

That’s a daft promise. And Union Finance Minister Arun Jatiely rightly called Gandhi out on this. “Those who are speaking of a single rate GST, have no understanding of the tariff structure. Tax rate on food items have to be nil, while items used by common man should be at the lowest rate of five per cent. Obviously, luxury goods and sin products and items that are hazardous to environment and health cannot be taxed at the same rate,” adding further that "food items cannot be taxed at the same rate at which a luxury yacht is taxed.”

In a political economy, asking for a single-rate GST and that too with tax rate of 18 per cent is a harebrained idea that only a politician like Gandhi could’ve championed. Probably, he was reading out from notes passed on by P Chidambaram – who as finance minister was unable to get the GST passed even after pursuing it for years, simply because of his inflexible approach on rate structure and compensation to the states. The chief reason why Narendra Modi-Jaitley duo succeeded in giving the country its biggest indirect tax reform is because of their willingness to listen to demands of the states and make compromises.

This is not to say that the current GST is perfect. Far from it. But the rates are not the overwhelming concern at the moment. As Jaitley himself pointed out that taxes on all items are lower under the GST structure than what they used to be under the previous regime. GST Council should now turn its focus on making compliance easier and reducing digital paperwork in filing returns and making input credit system hassle free.

To ease the burden on small businesses, GST Council made filling returns quarterly instead of monthly. As Indira Rajaraman points out in Mint, while this was well-intentioned, it may end up hurting them instead of helping as big buyers who file monthly returns and rely on small businesses for intermediate inputs may not wait for months to get input credit. They may shift to large producers who also file monthly returns. The system has to be uniform throughout the supply chain for it to work seamlessly.

More than the number of rates, another major area that warrants special attention of the GST Council is rational assignment of products to various rate categories. The products which are similar should’ve been put into one bracket but this simple principle wasn’t followed because the people entrusted to carry out the exercise were not experts but bureaucrats, who made revenue neutrality their primary concern instead of pursuing common sense.

Explaining the absurdity in the way products were assigned rates, Rajaraman writes:

The government has also brought down tax on restaurants to five per cent but made an error in withdrawing the reverse charge mechanism (RCM) for them. This needs to be reinstated as soon as possible. RCM, after all, is at the heart of the tax reform. Arbitrary exemptions like this are counter-productive.

Clearly, there are far more important concerns that need to be addressed first. These are highly complex issues where many nuances come into play. These are where the Finance Minister and the GST Council should turn their attention to.

As far as the number of rates are concerned, Jaitley should finally settle on three: five per cent, 15 per cent and 25 or 30 per cent. No items should be exempted. Five per cent rate is low enough to be justified to be levied on products that are currently outside the tax regime. The 12 and 18 per cent slabs could be merged with a new slab of 15 per cent taking their place.

Jammu and Kashmir Finance Minister Haseeb Drabu, a vocal supporter of GST, has hinted towards this. Hitting out at critics of GST, he recently tweeted, “Till 4 months back 100s of tax rates, slabs, brackets & exemptions were ok. Now 5 rates are chaotic!,” adding further, “What 5 rates. Merit, standard & demerit rate is the norm. So all there is to it is collapsing 12 & 18% . Will converge overtime.” The highest tax bracket should be set at either 25 per cent or 30 per cent (cesses should go if it’s the latter), depending on how much revenue is foregone on merging 12 and 18 per cent slabs. Some of it can be compensated by shifting items in zero slab to five per cent one.

Here’s another non-problem that Jaitley should avoid solving: bringing oil and liquor into the GST. Let’s face it, the ability of the states to tax has been badly affected under the new tax system. GST has taken away the taxing power of the states and concentrated it into one body where the ruling party at the Centre has an upper hand. Liquor and oil are the only major sources of revenue which the states can rely on to boost their finances. The Centre should let them keep it for the sake of fiscal federalism.