The Goods and Services Tax (GST) is turning out to be the proverbial riddle wrapped in a mystery inside an enigma. It is neither simple nor rational as its advocates arrogantly claimed. It was never going to be simple and easy. And it was indeed impossible for the government to have acknowledged the protracted teething problems with GST. Taxes are always ambiguous and difficult, and anyone who pretends otherwise was either fooling himself or others. The temptation of the Narendra Modi government to launch it as the mother of all reforms is forgivable, but it is not going to make things easy either for the government or for the people.
Prime Minister Narendra Modi and finance minister Arun Jaitley seem to be literally wracking their brains in making it palatable. Of course, the GST Council, comprising the finance ministers of all the states, and where up till now decisions have been taken on the basis of consensus, makes it easy to sell the decisions because every state has a stake and is equally responsible for the consequences. The Central government cannot then take the credit for either providing the much-needed relief through rate rebates, or more accurately speaking shuffling of rates.
The council gets the credit. The sleight-of-hand lies in the fact that as head of the council, Mr Jaitley announces the decisions, making it appear that the Centre is the architect of the change and the relief it may bring.
The 23rd meeting of the council in Guwahati on Friday has reduced the number of goods and services taxed in the bracket of the highest rate of 28 per cent to 50 items. The drastic reduction is sure to draw the criticism that the GST was launched in a hurry and that the rates were imposed randomly on different goods. Random is a mild term to be used because the right word is chaotic. And the chaos continues in the reshuffling of the rates. For example, the GST on tanks and other armoured fighting vehicles has been reduced from 28 per cent to 12 per cent along with wet grinders consisting of stone as grinder.
The list of articles for which GST rates has been reduced from 28 per cent to 18 per cent includes “wire, cables, insulated conductors, electrical insulators… trunk, suitcase, vanity cases… detergents, washing and cleaning preparations”, and the reduction in rate from 18 per cent to 12 per cent has in its list the following items: condensed milk; refined sugar and sugar cubes; pasta; curry paste, mayonnaise and salad dressings, mixed condiments and mixed seasoning. The list of rate reduction from 18 per cent to 5 per cent has puffed rice chikki, peanut chikki, revdi, tilrevdi, along with flour of potatoes put up in unit container bearing a brand name. There is the miscellaneous category which shows the GST rate for aircraft engines being reduced from 28 per cent/18 per cent to 5 per cent, aircraft tyres from 28 per cent to 5 per cent, and aircraft seats from 28 per cent to 5 per cent. We are literally in the bizarre, topsy-turvy world of Lewis Carroll’s Alice in Wonderland.
We know that taxation systems are not supposed to make sense. It can be argued that there cannot be uniform tax laws because economic activities are too numerous to be rationalised into a simple system. So, the confusion that arises out of different tax rates for different economic activities will continue to dog the finance ministry. It was both imprudent and impudent for this government to claim one tax for one nation.
What is expected of the tax system is rationality. And it is this element of reasonableness that goes missing in the tinkering of the GST rates that the council of state finance ministers, which is a mini-federal cabinet, and which finance minister Arun Jaitley proclaims to be an exemplar of the federalism at work, does at its meetings, including the latest. It is unlikely that the classifications and the rates will remain unchanged even in the short term. And it is of course unreasonable to expect the government to stick to a static system. The GST rates will be changed much too often, to meet economic rationality as well as political expediency, and finance ministers will continue to pretend that they are doing it all for very good reasons.
The politics of GST is easier to explain than its economics. The tax yields are supposed to increase manifold because of the uniform tax. But if the shuffling of rates happens at the frequency at which it is happening, that is many more times than in the annual Union Budget and state budgets, then it may not maximise tax revenues for the government. Prime Minister Modi and Mr Jaitley are well within their rights to play political ducks and drakes with the GST, and hope to garner electoral victories. But the damage that these changes do to the economy are immense.
Mr Jaitley’s tax philosophy as announced in 2014 was low taxes and high tax revenues. But what we seem to be witnessing is haphazard rate slabs that bewilder and entertain the reader of the GST Council’s recommendations — these need to be passed by Parliament and the state legislatures to become law — while it does not seem to promise either stability nor rationality to the taxpayer.
The GST is an empty political slogan promising the world in your palm. It is not a question of bad implementation of a well-intended tax reform. There is something wrong about its conceptualisation. There has been no simplification of the convoluted tax laws, and as can be been seen from the rate slabs, there is no rationality either. Will the coffers of the states now overflow with increased tax yields because of the flawed GST? The government seems to believe that it will.
But it looks like that tax buoyancy will be more due to expanded economic activity rather than wise taxation. There is nothing wise about the GST.