By Meghaa Gangahar
In 2016, India’s government set out to give bolder outlines to the shape and structure of the long-awaited Goods and Services Tax. In 2015, a committee headed by Aravind Subramanian toyed with the idea of a two-tier tax system for GST, while proposing a single rate system to be implemented. November 2016, however, saw the solidification of a four-tier tax system, though the viability of this system remains highly contested.
The four-tier GST has been finalised by the GST council setting the rate slabs at 5 percent, 12 percent, 18 percent and 28 percent. The lower taxation rates are for the essential items, whereas the highest rates are for the luxury and demerit goods. The government has taken concrete decisions finalising issues pertaining to the Goods and Service Tax in the meeting conducted on 16th January.
The peak rate will also be supplemented by a cess charge on goods such as luxury cars, tobacco and aerated drinks. The revenue pool created from this cess will be used for compensating states for any loss of revenue that they may suffer over the first five years of GST.
India’s finance minister Arun Jaitley opines that the rolling out of GST will mark the transition of a substantially non-compliant society into one having greater tax compliance. The multiple rates could pose challenges in proper classification of goods under the appropriate taxation brackets by unnecessarily complicating tax compliance. Former finance secretary Vijay Kelkar also believes in the practicality of a single-rate GST structure over a multi-rate structure.
He thinks that before considering multiple rates, a single rate would be easier to administer efficiently. Experience from the international scenario substantiates the popularity of the single rate system, as about 80 percent of countries which have adopted tax systems similar to the GST follow a single-rate structure. Another perspective favours the multiple tax system, claiming that it may be more suited to the Indian system due to the high-income disparity in India.
The multiple tax slabs would also help to ease out inflationary pressures that the economy may experience.
Among the few well-structured GST systems in the world, is the Australian model, having a single GST which is collected by the centre and distributed to the states. Significant examples of countries with a dual system of GST – collection by the centre as well as the states – are Brazil and Canada, with Canada having three varieties of tax. India’s GST is also modelled to have a dual system, which has led to major issues of contention between the central and state governments.
After a long-drawn deadlock over issues pertaining to control in the GST council, the meeting on 16th January concluded with some agreements in place. These decisions have spurred a reaction among tax officers who feel that the decision-making favoured the states. 70,000 tax officers and employees started a protest on Martyr’s Day (30th January) opposing the decisions made by the GST council by wearing black bands to work. They demanded the states’ proposals be revisited before roll-out. If the debate is stretched out, this may hinder the decision-making process. Though the months leading up to the roll-out may be rough, the decisions should not be made in haste as they may jeopardise the national economic interest.