The decision to usher in a simple tax, with just two rates, 18% as the standard rate and 5% as the merit rate, along with a de-merit rate of 40% for a select few goods, is salutary
For a country plagued by the peril of a hefty hike in tariffs for its merchandise goods by the United States, by far the single biggest export market, there are hardly any options to make good this mishap other than shoring up domestic consumption and finding alternative overseas opportunities. With the latter requiring indefatigable efforts, the easier option of withstanding the concussion through stoking up domestic consumption was deemed pragmatic by the coalition government at the Centre led by Prime Minister Narendra Modi.
Even as any contemplated reform of the Goods and Services (GST) Tax to facilitate domestic consumption on a higher gear must perforce have to get the imprimatur of the constituent states and the Union territories (UTs) in the federal set-up, the Prime Minister as his wont in a decadal stint at the helms unilaterally declared from the ramparts of the Red Fort in his Independence Day address to the nation that soon there would be consequential changes in the GST to help consumers and the states to derive the benefits of the indirect tax that would be veritably made a good and simple tax by reformative measures.
After a fortnight of this forthright offer of carrot, Finance Minister Nirmala Sitharaman followed it up with a raft of measures to restructure the multi-slabs GST at the 56th GST Council meeting on September 2, with states too joining the bandwagon lest any reservations over a few rates with attendant fall in prices on goods widely consumed by the people should be suicidal politically! Sans carping, the Centre in true spirit of cooperative federalism did well to prod the GST Council towards the set of reforms it nudged the states and UTs to follow suit in the larger interests of consumers and the country.
Foremost is the simplification of the multiple GST slabs ranging from 5%, 12%, 18% to 28% that stabbed the ardour of the industry and the consumer alike. The decision to usher in a simple tax, with just two rates, 18% as the standard rate and 5% as the merit rate along with a de-merit rate of 40% for a select few goods deemed ‘sin’ items and services is truly salutary.
The FM clarified that the revised GST rates would take effect from September 22, except for tobacco and related products. On these items, 28%, along with the extant compensation cess, will continue until the loan and interest for the cess are fully repaid. But the proof of the pudding is in the eating as they say, and one needs to be watchful as to how the industry is going to pass on the benefits of the pruned slab rates to consumers. This is particularly so when there is no anti-profiteering provision in the law to detect the defalcators.
It needs to be noted that the cessation of the 12% and 28% slabs and the shifting of items from these slabs to 5% and 18% meant a large number of consumer items would be available cheaper now. All food items, for instance, have been shifted to the 5% rate from different slabs. Television sets over 35 inches and air-conditioners will now be taxed at 18%, against 28 % earlier. Small cars and motorcycles would also move from 28% to 18%. It is gratifying that insurance products for individuals have been exempted, and GST rate has also been whittled down on agricultural equipment such as tractors and farm machines.
Experts contend that governments at both, the Centre and in the states would allow transitional credit provisions for businesses to adjust to the difference in the tax rates between the new and old rates on inputs and finished goods. This provision could help industry to accommodate the difference in the availability of eligible input tax credit (ITC) and output tax liability arising due to GST rate restructure. Unless this provision takes effect, prices of many commodities will not decline soon, and the authorities need to be alive to this.
For the states, a cheerful tiding pertains to an additional revenue stream for them as the GST compensation cess would be subsumed into the GST rates henceforth. The highest GST rate has been hiked to 40% from 28% and this change would apply to commodities that earlier attracted GST cess. States together would get 70.5% of the additional GST and 12% in addition to 28% tax on these commodities. However, a caveat is in order in that unlike GST compensation cess, a large part of this additional revenue, except the tax devolution part, would be realised by the states where consumption of the sin goods and sales of luxury cars are high.
Even as the lower GST rates presage a phase of pronounced uptick in consumption with people splurging on the back of the income tax relief extended in this year’s budget, how far this will help inject traction to the growth process for the economy needs to be seen as the months go by and the revised GST rates regime kicks in. The authorities need to be wary lest any complacency on their part would put paid to the gains supposed to flow from the GST reforms.
(G Srinivasan is a senior economic journalist based in New Delhi.)
