No RNR, Multiple Rates, No Silver Bullet: GST Is Finally On The Right Track 

With the first meeting of the GST Council scheduled for 22 September, it appears that the government is moving more sensibly and cautiously than what it seemed to be doing earlier. This is the right approach, for the goods and services tax (GST) is a new animal where neither centre nor states will have revenue sovereignty in indirect taxes, and movement forward needs a political and economic consensus. Getting it more or less right is better than getting it done fast.

Luckily, several impractical ideas appear to have been dumped in order to facilitate a consensus.

First, it is clear that the old ideal of having three rates (a standard rate of 18 percent, plus one merit and one non-merit rate) has been given up. There is now talk of four or even five rates— possibly at 10, 12, 16 and 25 percent. One more rate band above 25 percent should not be ruled out for some luxury items like cars.

Second, the fiction that we can have a revenue neutral rate (RNR) right at the outset has also been given up. It is now openly acknowledged that this is not possible, as Swarajya pointed out last week. Revenue Secretary Hasmukh Adhia has been quoted by the media as saying that RNR will not be possible initially and that, as in some European countries, “we too may have to begin with multiple rates and this is required to protect the poor and the middle class”.

RNR will actually be possible only once we know how revenue actually shapes up after varying rates are accepted for various product categories. It is not possible to start with an RNR upfront. It’s like putting the cart before the horse. Rates can converge later with experience.

In fact, Adhia had said as much in an earlier article written along with Chief Economic Advisor Arvind Subramanian in The Hindu, where he refuted the idea that India will have a perfect GST at the outset: “In no country is the GST — even today after many years of implementation — perfect, and was therefore quite flawed at inception. In complex systems, change is introduced, learning from implementation takes place, leading to further and better change. That is what happened with the implementation of the value-added tax by the states and that is what will happen with the GST. It is far better to start and allow the process of endogenous change to unfold over time than to wait Godot-like for the best time and the best design before it is introduced.”

The article also acknowledged that one must be “realistic about the timeframe for assessing the GST. The GST is fiendishly and mind-bogglingly complex to administer. Such complexity and lags in GST implementation require that any evaluation of the GST— and any consequential decisions— should not be undertaken over short horizons (say months) but over longer periods, say, one-two years.”

One should add that even two years may not be long enough to evaluate or fix GST. But what is encouraging is that the NDA government is working on the right trial-and-error method of implementing GST. It does not matter how long it takes to fix GST, or how fast we go, but if the direction is right, speed matters less.