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The GST Council has taken the easy way out by defining multiple slabs of rates. Socialistic political compulsions may necessitate a need for slabs of rates; the famous argument of Finance Minister Arun Jaitley being air conditioners and slippers cannot be taxed at the same rate.

But the argument is lost (1) because of consumption patterns, (2) because of restricting purchasing of the lower strata of population that possesses needs to buy goods attracting higher taxes, (3) because of administrative overheads, and (4) the classification itself.

Consumption Patterns

It is a fallacy to assume different sets of goods will be consumed by different segments of consumers, and hence there should be a differential rate. The argument that lower tax rate will help the citizens in a lower strata of income is not valid. Consumption is dependent on buying power. So the buying power in quantum is higher with citizens earning higher income. And if we read the quantum of consumption, consumption of slippers (as the example provided by the FM) is higher in the high income bracket.

Unsaid restrictiveness

Identifying items as “luxury” in nature and thus taxing them at a higher rate is very regressive in nature. Why should the assumption be that these goods should be taxed such a high rate? Small cars to be taxed 28%. Large cars will also be charged at 28% and will incur an additional cess. Such policies do not recognize the inherent power of this transformative regime – a single and unified regime will bring almost all businesses under its fold and that is in sharp contrast to the opaque system existing today. On the other hand it could lead to larger incidents of tax evasion.

Administrative overheads

Should there have been a single rate, administrative costs such as managing exemptions, determining differential rates by consumption, interpretation differences would be done away with. It is one rate after all. Maintain it, apply it, and run businesses; there will be no litigations on account of classification interpretations on account of multiple rates. For the government there is no confusion; it is one single rate.

Classification

There two categories for within essential items – one charged at 5% and the other at 12%. Standard rate is 18% and 28% depending on the goods. The objective of simplification is lost the moment multiple slabs are adopted. Classification of goods and litigations thereof not withstanding, this will also lead to intense lobbying by various bodies to have their products in the lower slab leading to indiscrete decisions by law makers such as bureaucrats & auditors.

These compromises seem to arise primarily on account of a lack of trust on the transformation (will it continue to bring in revenue, leave alone an increase in it) and reluctant partners. The objective of a simplified playing field for business is replaced with an objective to generate more revenue. This doesn’t augur well for a well envisaged mission. It is a big let down.

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  1. Paroma Sen

    Very nicely put Arun, and couldn’t agree with you more. Especially with regard to the unnecessary restrictiveness – assuming electric/hybrid cars and air purifiers also fall into the “luxury” category (of course in Delhi now air purifiers are now a necessity rather than aspirational) – how does this increased taxation tie in with the government’s vision of a new age India? One would imagine there would at least be some rationalization around which product categories should be incentivized with lower taxes so that people buy more! 

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