Finance Minister Arun Jaitley has managed to break the stalemate with > States at the Goods and Services Tax Council ’s fourth round of deliberations over the contentious issue of tax rates for the new tax regime. He did this by retaining the standard rates of 12 per cent and 18 per cent proposed at the Council’s last meeting, but tweaking the highest and lowest tax slabs from 26 per cent to 28 per cent and 6 per cent to 5 per cent, respectively. Concerns of States that levy Value Added Tax at 5 per cent on items of mass consumption were met by lowering the threshold GST rate. Foodgrains and other items considered essential, that together constitute roughly half the consumer price inflation index, have been exempted from GST. Since inflation is a tax on the poor and indirect taxes are regressive, this would help check worries about inflationary repercussions. But raising the highest tax slab to 28 per cent to balance the fiscal books is a surprise, especially since it would be levied on items such as consumer durables and cars that are now taxed at 30-31 per cent. Even if producers do pass on this rate differential to customers, this is hardly likely to spur the kind of consumption that could drive more manufacturing investment, create jobs and bolster economic growth.
The > cess on top of GST to be levied on luxury and sin goods is neither desirable nor efficient. Unless its levy is restricted to end-use products at the point of sale, it would further distort the efficiency gains from GST as input credit for cess paid on intermediary goods is unlikely. The government has argued that the cess will help compensate States for five years and that the Council can take a call on doing away with it thereafter. Similar visibility should be provided on dovetailing the multiple tax rates into two or three in the coming years, if not the international norm of a single GST rate. Multiple rates will not just pose an administrative challenge but also spur ugly corporate lobbying of the kind that the Finance Minister wanted to nix by phasing out exemptions in direct taxes. Days before he became Niti Aayog Vice-Chairman, Arvind Panagariya had flagged the cost of focussing too much on one reform, which spills over into other reforms being delayed. That the recently constituted GST Council has covered much ground with unanimous consensus augurs well for the GST deadline, including refining the model GST law and ensuring industry and the tax department are ready to make the GST switch by April 1, 2017. But the proposed rate structure is still too complicated to meet the objective of radically simplifying tax compliance.