GST decisions: A problem of priorities

It is not the first time that small items are being taxed differently based on their packaging or content, but these moves now show how an initiative that was expected to simplify the tax system has made it complex.

Last week’s Goods and Services Tax (GST) Council meeting at Jaisalmer, Rajasthan, has been criticised for the postponement of important decisions and for giving detailed attention to minor matters. The decision to impose differential tax rates on popcorn has become the subject of social media satire.

The meeting decided that salted popcorn would attract 5% GST, pre-packaged and labelled varieties 12%, and caramel variety 18%. Finance Minister Nirmala Sitaraman’s defence of the proposal only served to draw attention to the lopsidedness of the GST system. It is not the first time that small items are taxed differently based on their packaging or content, but these moves now show how an initiative that was expected to simplify the tax system has made it complex. The undue attention to minor details amplifies the indecision on major issues.

Apart from fixing the tax rate of popcorn, the Council recommended lowering GST on fortified rice kernels of a certain variety, and exempting the tax on gene therapy. It decided that there would be no tax on the penal charges levied by lenders for non-compliance with loan terms. Taxes are a reality of life and all economic goods and services should be on the radar of the authorities. But they should not ignore important issues. The Council, again, postponed its decision on a demand for cutting GST on insurance, including health insurance policies. A ministerial panel had made a recommendation towards this and the government had promised that it was being considered. Beneficiaries whose premiums were due this month were waiting for the decision. The Group of Ministers (GoM) on rate rationalisation has sought more time, and another GoM that is reviewing the compensation cess has been given an extension. These are important decisions that cannot be kept on hold.

The GST system needs rationalisation and simplification. Most countries do not have the Indian system of multiple tax slabs. A multiplicity of slabs gives rise to inefficiency and malpractices. States surrendered their tax powers to the Centre to create a single system for the country. Many of them are unhappy that they have no control over the decisions taken by the Council. They also feel that they are receiving less than their fair share of taxes, especially because there is no sharing of revenue from the special taxes. In this situation, many states support proposals to expand the scope of GST or to increase the rates. That would make the system more complex.