It will soon be 10 years since the first step was taken towards the introduction of the Goods and Services Tax in India. The GST Act was passed later. The unified, multi-stage, destination-based tax has undoubtedly done away with the plethora of taxes that Indians previously had to deal with. Be it sales tax, central sales tax, octroi, excise, purchase tax, and many more—these were all encapsulated in a single tax: GST. The collection of tax at the consumer level has effectively shifted the incidence from the place of production to the place of consumption. Whether it is a company using semi-finished goods that benefit from taxes paid on them, or final consumers, this new consumption tax was widely appreciated by everyone.
The GST Council, comprising state and Union representatives, normally meets once a quarter to take stock of the issues and try to remove bottlenecks in a bid to simplify the collection process. The 54th GST Council will be meeting in the first fortnight of September to take stock.
While 8 years is a relatively short time to reflect on the efficacy of the consumption tax, one can take heart that GST or VAT has gained popularity in 160 countries across the world. Malaysia is probably the only country to have abolished GST and replaced it with Sales and Services Tax. Even so, the Indian GST Council needs to take stock not just of the collection of GST and the proportionate receipts that the states receive, but also of how to reduce the plethora of tax rates and lay down a plan to move to a single or two-level tax rate across all goods.
At 28 per cent, India probably has the highest incidence of tax. France, which was the first country to introduce GST, has a maximum incidence of 20 per cent; China, which embraced GST in 1984, has 13 per cent; VAT in the UK is 20 per cent at the highest level; in Indonesia, it is 11 per cent; while the USA does not have GST. Cars in India continue to be classified as luxury goods and attract 28 per cent, while cigarettes, categorised as sin goods, attract the same incidence of tax. The Council needs to take a relook at this issue.
Month after month, the government keeps revealing the higher and higher taxes it has collected since the introduction of GST. Currently, Rs10.6 lakh crore is the receipt budgeted as the Centre’s share of GST.
It is not clear whether the GST Council members receive a GST break-up of contributions after 8 years, as is done in several other departments, such as exports or imports or the Index of Industrial Production. This classification of GST contributions and segment-wise classification will also help in making more meaningful decisions.
GST as an indirect tax was justified on the grounds that it was more democratic in nature, as every user had to pay for the goods and services they used. A decade down the line, it remains to be seen if this objective has been met. Or are the poor worse off with the introduction of this tax? By putting a 5 per cent GST on items of daily use like tea, sugar, edible oil, spices, and coal, has the consumption rate gone down? Coal is, of course, more of an industrial consumption item and too expensive for either the urban poor or rural poor below the poverty line. Is the marginal propensity to consume impacted by GST? Is it just the 5 per cent or the disproportionate rise in prices responsible for this? There have been numerous articles suggesting that GST impacts the poor the most. However, a proper classification with details can help in arriving at a proper decision. If the collection from these items, including packaged foods, is not very high in ranking, the Council could even do away with it.
In economics, in the post-World War scenario, it was taught that labourers should tighten their belts and eat bread to have cake later. However, when bread attracts 0 per cent GST and cakes 18 per cent, will this be possible? Given that GST is moving upwards, as it should in a growing economy, the GST Committee needs to moot for a selective removal of even 5 per cent GST on items of daily needs like packaged food items. Instead of helping the poor by giving funds to them through direct transfers, it may make more sense to save them from taxes after collecting taxes from them. A better way would be to abolish taxes on marginal items.
The GST Council needs to make more of an effort to rationalise the incidence and subgroups. States also need to be consulted to get both petrol and diesel into the gamut of GST. Lower prices invariably increase
consumption.