The Goods and Service Tax has evoked immense scepticism owing to revision of prices of products and services. Both increases and decreases in the prices of consumer goods are expected. Essential products will become a shade cheaper while premium products associated with a luxurious lifestyle will become more expensive. The larger question, however, is whether Prime Minister Modi’s GST is a good tax system or not?
To answer this we need to revisit ‘Wealth of Nations’ (1776) by Adam Smith, who laid down a set of rules to build a ‘Good Tax System,’ or canons of taxation. In addition to these canons, modern economists have added a few criteria suited to the economic environment. The four canons of good taxation are equity, certainty, convenience and economy. The other features to be considered are productivity, simplicity, diversity, elasticity and flexibility. This implies that the primary aim of levying a tax is to generate revenue for the government to run public services, people should be taxed on their ability to pay and tax should not discriminate between individual taxpayers. The principle of equity is to establish social and economic justice among citizens. Every citizen should be taxed depending on his or her ability to pay and the rich should pay more and the poor should either pay little or no tax at all. The GST satisfies this criteria as it has four different tax rates based on the type of goods available i
n the market. While any essential goods or services like milk and dairy products, printed books, hotels and lodges with tariffs below Rs 1000, among others pay zero tax, a tax of 5% is imposed on items which are not essential, but help improve people’s standard of living like branded paneer and frozen vegetables.
Goods and services that come under the 12% tax rate are categorised under leisure consumption and are bought by high networth individuals. These include butter, chess boards and even frozen meat products. Products in the 18% tax bracket are even more luxurious and only those with high incomes can afford to buy them. Products which only the rich are inclined to use, fall under the 28% slab. Not only luxury products like small aircraft or business jets, but also items like tobacco, and cigarettes, figure in this category.
GST therefore satisfies the canon of equity and is non-discriminatory compared to VAT, which was arbitrary as it was based on the will of the respective state governments. It also satisfies the canon of certainty, which makes it clear that tax rates should not be arbitrary, as it imposes a uniform tax structure across all states of the country for a particular product. As for the principle of convenience, which lays down that it should be convenient for people to pay tax in terms of time and mode of payment, there is not much difference between the existing tax system and GST because for consumers any indirect tax is very convenient to pay.
But GST proves superior to the existing tax system with its last canon, which says the revenue earned must be far more than the cost of tax collection, because it is less complex and more economical to collect. Under the existing tax structure, the lack of integration between the Centre and the state legislation hampers GDP growth and the cost of collection and maintenance of tax records is higher. So except for the canon of convenience where the existing tax regime is on par with GST, the other 3 canons make it superior from an administrative perspective.
(The writer is an Assistant Professor of Economics, School of Law, Christ University)
