GST Council cuts rate on 211 items: Great move but the big reform is still a hostage to political games

gst rates fixed item wise

Great! In just five days from now, as many as 211 items – from cosmetics to detergents to granite and marble – will become cheaper. The GST Council meeting in Guwahati on Friday decided to knock 178 off the 28 percent rate bracket and put them in the 18 percent bracket and put another 33 into lower tax brackets than they were originally.

Eating out will also be easier on the pocket because all standalone restaurants are now going to be taxed at 5 percent, instead attracting different rates based on whether or not they were air-conditioned. This is actually a rap on the knuckles on the restaurant industry since it was found to be not passing on the benefit of input tax credit (ITC) to consumers (they have now been denied the benefit of ITC).

Small businesses can breathe easy as the GST Council has come out with a string of deadline relaxations and lowering of penalty for delayed filing. The composition scheme has also been tweaked to remove some problem areas.

With all these changes, has the country moved closer to a Good and Simple Tax? No. Because, while they have certainly tackled some pain points, they do little to address basic design flaws that the GST is labouring under.

Firstly, Friday’s wholesale rate reductions do absolutely nothing to simplify the complex and complicated structure of taxation. Taxing of the same kind of products in different slabs continues. The multiple rates provide immense scope for evasion. Many restaurants had been found to be claiming ITC (the benefits of which they didn’t pass on to customers) on purchase of branded goods (rice, wheat etc) though they were using unbranded goods.

As economist Indira Rajaraman has pithily said in this Livemint article, “instead of a coherent block-wise mapping of products by type on to rates, products of the same type were assigned to different rates with no visible rationale.” As long as this continues, the GST will continue to be problematic and pose an implementation headache.

But what were many of the items that were in the 28 percent category doing there anyway? And why are many continuing there? How can marble and certain sanitary fittings be taxed lower than cement? Can any pucca house be built without cement? Marble flooring can be an option, cement for the walls cannot. This is not to argue for a higher GST on marble, but just to point out the utter lack of logic in such decisions. How are washing machines – used even by the neo-middle class these days – categorised as a luxury item?

Will this mean that there will be further rate cuts in future meetings? India certainly needs to move towards a two-slab structure and the reductions will be a step in that direction. But this movement needs to be calibrated and not be ad hoc, as seems to be the case. Almost every meeting of the GST Council after the rollout on 1 July has seen some rate reductions.

As Rudra Sensharma, professor at IIM, Kozhikode pointed out in a tweet, frequent and piecemeal tinkering with rates create menu costs and business uncertainty. Actually, it also creates scope for lobbying. Why not, he suggests, have an annual review of GST rates instead? Why, indeed, not?

Some experts have expressed concern at the revenue impact of these reductions – some estimates put it at Rs 20,000 crore. But state finance ministers must have agreed to these changes if it was going to make a huge dent. The Jammu and Kashmir finance minister Haseeb Drabu told ET Now that the move for these rate cuts were emboldened because month on month revenue losses have been less than expected. Some states, he said, had even been showing a revenue-neutral position.

Secondly, it is well recognised that the GST structure is flawed because of the non-inclusion of petroleum, real estate and alcohol, as well as the large number of items taxed at 0 percent. This is one of the reasons that the rates needed to be kept high. It is a well-accepted principle that more items in the tax net allow for lower rates and more items outside the tax net make for higher rates. Finance ministers from Congress ruled states belatedly woke up to this and said they would demand that petroleum and real estate be brought into the GST. However, finance minister Arun Jaitley said there had been no time to discuss this. It is a reflection on all our finance ministers that they fail to find time to discuss important, structural issues and fritter away time in tinkering with rates.

A word, therefore, on the politics of Friday’s exercise. State finance ministers have little incentive to address the design problems of GST because the blame for poor implementation is laid at the door of the central government. Nor do they suffer because of the poor design because even if this leads to revenue loss, they are going to get compensated for the first five years (there is another design flaw here, but more on that later). The complicated rate structure is also because every state has its own pet products/service that it wants either exempted or taxed at a lower rate.

Former Finance Minister P Chidambaram had been saying, ahead of Friday’s meeting, that Congress finance ministers will force an overhaul of the GST. But clearly, these ministers have not been able to get their colleagues to take up the design issues. We will never know if they seriously tried to do so. This shows that perhaps no political party is willing to address this in a serious manner, so long as they can continue to blame one another.

But this political one-upmanship needs to end.

In an interview to ET Now, Chidambaram said that outside experts should be involved in any attempt to fix the fundamental/structural flaws in the GST. That is a good suggestion and needs to be acted upon. GST design is not something that can be left to bureaucrats alone.

The government needs to take the initiative on this. And the Congress needs to give an assurance that it will abide by whatever recommendations these outside experts give. Let us not forget that the Congress stalled the passage of the GST constitution amendment bill for as long as it could, insisting that it put an 18 per cent cap on rates, even though all experts said this can’t be written into the Constitution. Regional parties also need to come on board.

GST is a crucial reform and it, as well as the Indian economy, should not be held hostage to political games.

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