A stiff dose

The Central government’s announcement of starting a new era of GST (Goods and Services Tax) from the beginning of the next financial year is a welcome relief to industry and trade as the migration to new tax regime is now a certainty. It has been decided to have two rates of GST on goods in the first two years, culminating into one in the third year and one uniform tax rate for services. Tax collected under GST will be shared equally between the Centre and states.

Though the Centre was keen to have only one rate for GST, it was forced to accept dual rates as a compromise formula with the states who did not want to give up their rights to levy taxes. Since imposing taxes, giving exemptions or making changes in the rates are political tools to appease voters, state governments were always reluctant to give up their autonomy. Agreeing to dual rates for the first two years was a means to break the deadlock and set the GST ball rolling.

Migration to GST is certainly the right step because the simplification of procedures will improve tax compliance and is expected to raise India’s tax revenue significantly. Our industrial sector, currently marred by the multiplicity of taxes and cumbersome procedures followed by each state, will also find it easier to do business. But the big problem is that the rates of GST are very high. In the first year, for example, essential goods will be taxed at 12 per cent and all others at the rate of 20 per cent. Experts believe that the ultimate tax rate of 16 per cent will also be much higher than the expected revenue-neutral mean tax rate of 12 per cent. Even the 13th Finance Commission had earlier recommended 12 per cent as the mean rate. Similarly, the 16 per cent tax rate on all services will also be a big burden as the present rate varies from 6 to 10 per cent. As all these taxes will ultimately be borne equally by the citizens of the country, the poorer section of society will be worse off. One way of tackling the issue is to continue with dual rates — lower rates of taxes on goods and services consumed by the vast majority of poor people and a higher rate for expensive, not-so-essential items.