Time For A Good and Simple Tax

Return to the founding principles of GST is key to fighting off the threat of bureaucratic and political capture of India's biggest reform. EPISODE #195

Dear Reader,

A very happy Monday to you.

Later today a ministerial panel or the Group of Ministers (GoM) mandated by the Goods and Services Tax (GST) Council will convene to discuss the long pending rate rationalisation. Interestingly, this meeting takes place in the backdrop of an unsavoury public spat on the very issue of rate rationalisation, between Finance Minister Nirmala Sitharaman and a restaurant owner during a recent visit to Tamil Nadu.

Will a chastened GoM bite the bullet? Or will it, once again, kick the can down the road? This week I try and uncover how what was the biggest tax reform ever and how it is at the risk from bureaucratic and political capture.

The cover picture is of a wall art on the Dodo, the now extinct bird. At one time it was endemic to Mauritius.

I also wish to remember a former colleague from Mint, Remya Nair. She tragically passed away last week. Not only was she one of the finest reporters I had the opportunity to work with, Remya was a wonderful human being with impeccable integrity. For someone so young, she knew the critical difference between right and wrong, a rare quality in most workplaces today. A terrific role model. My heartfelt condolences to her family and friends.

Happy reading.

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GST Overreach

Little under a fortnight ago, a local businessman in Coimbatore engaged Finance Minister Nirmala Sitharaman on the challenge of doing business in a regime of multiple and complex rates for commodities under the newly instituted regime of Goods and Services Tax (GST).

Like everything else these days, the matter took an ugly political turn and spiralled into an slugfest, burying the central point—that the existing GST rate structure is sell past the date and needs an immediate reset.

Yes, the existing structure has worked very well, but given India’s bright economic future it has to be reworked. Worse, frequent tinkering with rates of specific commodities is creating absurd situations.

For example, last year the GST Council approved some changes in the rates on food items sold inside a cinema hall.

Sharing the screen grab from a ToI report, which summed up the bizarre outcome: If you purchase your tickets and snacks in a bundle online the GST charged is 18%, and 5% otherwise!

Further, some GST rules are bizarre. For example, a consultant who has an assigned GST account has to mandatorily display the same on a name plate outside his/her door. If not, you will be inviting scrutiny and a fine. I personally know of two people who have been subjected to this rule. Besides forsaking privacy, this rule makes no sense—just plain red tape.

This is tragic.

The rollout of GST in 2017, after being on the anvil for nearly two decades, was a game changer. For the first time, the country was economically unified. Previously, it was akin to goods travelling through 30-odd sovereign jurisdictions, making it extremely difficult to do business.

Further, sales tax, unlike Value Added Tax and GST, had a cascading impact on the final price. Worse, it left business vulnerable to constant harassment by authorities, creating incredible production inefficiencies and incentivising tax evasion and corruption.

However, creeping bureaucratic capture and political capitulation is steadily undermining the grandiose goals that inspired GST. It is as if the ghost of sales tax and excise duties is returning to haunt the most audacious reform initiative ever. Not only is compliance costly and complicated, the complexity of the existing rate structure as apparent in the examples above is leaving the door open for a raft of fresh legal disputes.

It is, like I have written previously, time to consolidate the gains from GST. Not fritter them away.

Preserving Status Quo

The irony is that the GST Council acknowledged the challenge about the complexity of the rates, three years ago and constituted a ministerial panel or group of ministers (GoM).

Its terms of reference were explicit. Sharing the gist from the original notification below (the bold is my doing):

“The GoM on Rate Rationalization shall—

(a) review the supply of goods and services exempt under GST with an objective to expand the tax base and eliminate breaking of ITC chain;

(b) review the instances of inverted duty structure other than where Council has already taken a decision to correct the inverted structure and recommend suitable rates to eliminate inverted duty structure as far as possible so as to minimize instances of refund due to inverted duty structure;

(c) review the current tax slab rates and recommend changes in the same as may be needed to garner required resources; and

(d) review the current rate slab structure of GST, including special rates, and recommend rationalization measures, including merger of tax rate slabs, required for a simpler rate structure in GST.

The GoM may suggest changes that may be implemented immediately and the roadmap for implementation for the changes that should be implemented in short and medium term. The Group may submit interim report for such immediate measures as it may deem fit. The Group shall submit its report in two months.”

And, three years later, states ruled by opposition parties seem hell bent on ensuring status quo. And, given the political overkill by the leadership of the Congress party in condemning GST, why would a politically diminished Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) rock the boat.

Ahead of the GST Council meeting earlier this month, Economic Times quoted two ministers in the GoM on rate rationalisation saying:

Chandrima Bhattacharya, West Bengal (ruled by the Trinamool Congress):

“I have said there should be no changes in the GST slab. A presentation will be made before the Council.”

Krishna Byre Gowda, Karnataka (ruled by Congress):

"What do you achieve by disturbing it (existing slab structure)? We said in the next meeting we will discuss it (reducing slabs).”

Revenue Fears

Clearly, the political leadership both at the centre and state is unwilling to risk shrinking the slabs. At present there are five slabs: 0% (Nil tax), 5%, 12%, 18% and 28%. 

However, if you include the GST cess—imposed on select so-called sin goods like Pan Masala, motor vehicles and so on—then there is another tax slab. Effectively, India has six tax slabs for GST.

The fear in the GST Council is that a rationalisation of slabs may upset the present upward trajectory in GST receipts. (Check out the graphic above, which shows a steady upward trend in GST collections.)

If indeed this reasoning is right, then it is specious.

The political leadership cannot ignore the issue of the ease of doing business. If India is to transition to ‘Viksit Bharat’ then ease of business has to be an imperative, not an option. It is only in the last decade that business has ceased to be a dirty word and India Inc is now very much a legitimate stakeholder in the Indian economy. Hence, this is the moment to build out the economy by growing business.

I have written about this previously, so will not belabour the point. Sharing a clip below and the link here, in case you wish to re-read it.

One Nation, One Tax

To be sure, unlike opportunistic and cynical politicians, I am not railing against GST. Instead, I am championing its cause. By allowing bureaucratic and political capture we are risking the most marquee tax reform ever.

To recall what I have argued in the past, GST is no mean achievement. It is a game changer that led to:

• Collapsing 36 tax jurisdictions in the country into one tax;

• Subsuming 17 taxes and 13 cesses levied by the union and state governments;

• Doubling the number of GST registered tax payers to 1.40 crore;

• Ensuring consensus in all but one of the 48 meetings of the GST Council (the apex body made up of the union and state governments guiding this indirect tax regime)

You may recall that the idea of GST was first mooted in 2000 by the then National Democratic Alliance regime led by Prime Minister Atal Bihari Vajpayee. It took 17 years to be productionised. Due tribute should be accorded to the late finance minister Arun Jaitley, who nudged, cajoled and prodded every state finance minister, regardless of their political affiliation, to generate bipartisan consensus on this marquee tax reform.

Reject Status Quo

Several experts are arguing similarly.

Sharing a hard hitting opinion written by Govinda Rao, the former director of NIPFP and a scholar who has been researching indirect taxes for a long time. Check out the screen grab above.

Explaining his case, Rao said:

“The prevailing GST structure is sub-optimal and needs major reforms if we want to make it competitive while ensuring revenue productivity.  India’s aspiration to become a developed country by the middle of this century requires having a competitive tax system with minimal cascading effect. 

It is important to reform the tax system to steer it towards international best practices to have a broad base, lower and less differentiated rates, and a simple and transparent structure.  In such a system, the three costs associated with taxes — collection costs, compliance costs, and economic distortion — are minimised. 

This is the right time to embark on the directional change in the tax system because major reforms are best implemented when the economy is on an upswing to ensure revenue buoyancy.”

Rao then goes on to offer a solution after sharing some startling data points.

“Unfortunately, the GST Network does not provide rate-wise revenue collections, but the information collected from Karnataka shows that more than 75 per cent of GST revenue in 2023-24 accrued from two rates — 12 per cent and 18 per cent. 

A back-of-the-envelope calculation shows that combining these two rates into a 15 per cent rate will be revenue-neutral.  Similarly, limiting the 28 per cent rate to demerit goods would free the construction and passenger vehicles industry from the excessive burden, and can improve the labour-intensive construction sector and passenger car services sectors. 

Even if some revenue is sacrificed on this account, this could be offset by pruning the large list of exempted items and increasing the 5 per cent rate to 6 per cent. 

Thus, effectively, the number of rates can be reduced to two with an additional rate on sumptuary or demerit goods without sacrificing revenue.”  

It is time to call this bluff about potential revenue losses.

Similarly, another argument against tinkering is that rates on some commodities may move up and this is politically a wrong signal. What these critics forget is that the tax rate is ad valorem and not on a fixed price—for instance, a hypothetical 12% GST rate on a packet of biscuits is not the same if imposed on a bucket of ice cream.

In short, it is time all the FMs stood up and be counted. Long pending GST reform, especially rate rationalisation, can no longer be put off. India’s economic future, which everyone believes is bright, depends on this to a large degree.

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Recommended Viewing

Sharing the latest episode of Capital Calculus.

The recent decision of the union government to roll out the Unified Pension Scheme for its employees, amid a raging political debate, put the spotlight on the idea of retirement planning. It should come as a shocker that 90% of India’s 500 million-plus workforce does not enjoy retirement benefits.

In little more than a decade India will start growing old. Not only are Indians living longer they are also becoming increasingly vulnerable to non-communicable diseases. So how do the youth of India plan for the winter of their life?

To unpack the idea of retirement planning I spoke to Sumit Shukla, MD and CEO of Axis Pension Fund. His short answer, the youth of today should have started retirement planning yesterday. Must watch, especially younger readers.

Sharing the link below:

Till we meet again next week, stay safe.

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Thank You!

Finally, a big shoutout to Gautam and Aashish for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all readers. Gratitude to all those who responded on Twitter (X) and Linkedin. 

Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I will be grateful therefore if you could spread the word. Nothing to beat the word of mouth.

Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.