Contrary to the perception that Goods and Services Tax (GST) will make people pay lower taxes and hence increase the tax base, a government panel has suggested there will be no large shift.
The panel headed by Chief Economic Advisor Arvind Subramanian has even warned that tax burden on some commodities will be inconsistent with policy objectives once the GST regime sets in.
“A preliminary analysis indicates that there should not be large shifts in the tax base in moving to the GST,” the panel said.
Apart from giving a sudden and sharp rise in service tax rate from 14.5 per cent to 18 per cent, the GST is also expected to make food, transport, housing, clothing a medical treatment more expensive for the poor.
A study by Penang Institute in Malaysia suggests that lower income household will bear a higher tax burden under the GST than higher income household as the taxes are uniform on both rich and poor.
GST aims at lowering tax rates and broadening the base, especially in case of India where less than 4 per cent of people file tax return and only a few thousand report income more than 10 lakh.
The net result is high tax rate for those who pay taxes. “The broader the scope of exemptions, the less effective the GST will be. For example, if precious metals continue to enjoy highly concessional rates, the rest of the economy will have to pay in the form of higher tax rates on other goods, including essential ones,” the panel said.
It, therefore, recommended elimination of “exemption raj” rife with opportunities for selectivity and discretion.
Global studies have also shown that putting GST on essential items, especially food, has its own flaws as the vulnerable sections of society need more compensation when there is an increase in GST rate.
It leads to more compensation to certain sections resulting in less money for cutting the more flawed taxes.
To meet this objective, the panel has also suggested effective implementation of direct transfer of subsidies rather than relying on tax exemptions.
DH News Service
