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India GST Rates of Tax dilemma



Principal Consultant, STVAT Consulting


(In this article, Sridharan opines that fewer GST rates of tax is not sacrosanct. Multiple rates is best suited in the Indian Context. He also opines that taxes on services should not increase from the present rates.)


It is often said that an ideal national GST / VAT has three rates for taxation of Goods and Services Exempt list of necessities, list of essential goods subject to lower merit rate and all other goods and services subject to tax at the higher standard rate of tax.


There is always a dilemma on transition to a national GST of how to structure the rates of tax in the new dispensation and integrate the present tax structure harmoniously in the new system without hardship to the low / middle income strata of the society and be not inflationary.


While fewer slabs of tax rates may make tax system less complex, more efficient to administer and may be lesser compliance cost, can just making the system less complex be the singular objective of a historic reform of implementation of GST in India? Does not equity issues merit consideration?


In advocating fewer rates, it is justifiable to penalize the poor and middle class by slashing exemptions and moving essential goods and services to a higher merit rate or standard rate.


It is pertinent to note that the lower/middle strata of society spend higher proportion of their income on food, clothing and other essentials more than the affluent though in absolute value the amount spend by the affluent may be higher.


There are also several goods and services that are locally produced and consumed in individual states and have been traditionally been either exempt or subject to lower rate of tax. If these goods and services are pushed to a higher merit rate or standard rate, the respective activity would be adversely affected or there would be rampant tax evasion.


It is important to ensure that service tax on services predominantly consumed by the common man like telecom, restaurant services etc., do not go higher than the present 15%. If feasible it should be fitted into a lesser rate so as to win popular support for GST. Perception of GST not increasing the present taxes is equally important as the tax burden not really increasing. This may mean that abatements presently available will have to be factored in.


It would be a real challenge for the GST Council to fit in the Goods and Services in different slabs balancing the need to not lose revenue and at the same time not increase the tax burden to the common man.


In the context of proposed increase in GST rate in Australia, an interesting study by The Australian Council of Social Studies, elaborates on how the lower income earning population would be impacted by removal of exemption on food and essential items and increase in GST Rate as the proportion of their income spent on essentials is higher compared to the rich.


Click to read the report of Australian Council of Social Studies on effects of GST Rate increase.


This study would also be relevant in the India context.


Fewer slab rates in GST is not sacrosanct. Besides being revenue neutral to Government revenue, the rate of tax has to be revenue neutral to the consumer.


At this point of time, what is relevant is moving towards a uniform rate of tax and system across India One Nation, One Tax. At a later point of time depending on revenue realization and inflation trends the rates of tax can always be fine tuned.


It would also be good to prune the list of exempted goods and services (other than basic food, education and health services) and fit them in a lower slab rate so that the flow of credit of input tax is not broken.


Multiple GST slab rate initially is socially and politically a better option.


In this context, the report that the thought process of the Union Government is to have four slab rates is welcome.


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Date : September 19, 2016


The articles in Editor's page is based on inputs available on the date noted and is to be read in that context. The articles are usually not updated for later development.