GST must be fixed, and this involves changing rates PDF Print E-mail
Wednesday, 18 December 2019 09:35
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Frequent changes are best avoided; but cutting rates is the only way to fix GST & states will agree right now


Both Fifteenth Finance Commission chief NK Singh and West Bengal finance minister Amit Mitra have argued, separately, that the GST Council—when it meets later today—must not make any more changes in the rate of taxation of goods and services. Singh has argued that a tax system takes time to stabilise, and that frequent changes in the rates prevent this from happening. And, Mitra has argued that while there is a large shortage in GST collections, removing tax exemptions or raising the 5% tax level, for instance, will hit the poor who consume these goods; at a time when the economy is suffering from a demand problem, he has argued, this will be especially problematic. Mitra has also argued that since, over time, the number of items in the 28% bucket has come down from 234 to just 30, putting a cess on them implies reversing the tax reduction. Several other state finance ministers, from Bihar to Kerala, have also voiced the same opposition to the possibility of hiking GST rates or removing goods from the exemption list to increase collections; the GST Council letter to the state finance ministers has asked for a discussion on these possibilities.

The problem, however, is that while there is a large gap in collections—assuming collections don’t rise dramatically in the remainder of the year—there can be no solution without either hiking rates or eliminating some exemptions; business-as-usual is simply not going to work. And, while Mitra has suggested the central government work hard to remove tax evasion—estimated at around Rs. 90,000-100,000 crore a year—this is not something that union finance minister Nirmala Sitharaman can fix with a magic wand. The only way to get more GST collections is to fix the flawed GST system we began with, one with too many rates and too many exemptions; most people blame then finance minister Arun Jaitley for this, but if the states didn’t agree to less rates and exemptions, the only option for him was not to have a GST. As a result, there are seven rate slabs for goods and five for services. In addition, some slabs, like the 5% one, don’t allow for input-tax credit or limit the refunds; this ensures that the value-chain gets broken and, to that extent, encourages tax evasion.

Till the states were getting their compensation, which effectively ensured a 14% annual hike in their GST revenues, they were unwilling to either remove exemptions or raise rates—both are required, along with better intelligence work to stop input-tax fraud. But, with the compensation cess falling dramatically short, states are no longer getting their compensation payments on time; while the government has collected Rs. 100,00 crore of GST revenues per month on average in April-November, it has set a target of Rs. 115,000 crore in the remaining four months of the year. As a result, states are now more willing to look at both options of removing exemptions and hiking tax rates. The 5% slab fetches around Rs. 120,000 crore per year, and raising this can fetch a tidy sum. Raising taxes will also reduce the input-tax credits given—the loss on textiles, for instance, is around Rs. 30,000 crore a year since inputs are taxed at a higher rate than the final cloth. This is the best time to push for fixing the GST and moving it towards a single or a dual rate; finance minister Nirmala Sitharaman as well as her counterparts in the states should grab the opportunity with both hands.


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