Towards a simple and rational GST

Social media went pop over popcorn on Saturday, sharing details on the differential Goods and Services Tax (GST) rates on variants. In all fairness, such idiosyncrasies aren’t unique to India; the developed world is replete with similar instances for various products and services (not necessarily popcorn). But, two larger issues with India’s indirect tax regime need to be promptly addressed.

The first has to do with the details. GST is no longer the Good and Simple Tax it was touted to be. The window for the rationalisation of the tax slabs (currently four) has been extended, and it isn’t clear whether this will even happen. And by getting into the intricacies of use-cases, the category of the manufacturer or service provider (small industry or large), the nature of the final product or service (Is it in the budget or affordable segment? Or the popular one? Or premium?), and other finer aspects that it should not have, the GST Council has not made it easy to do business. The best tax regimes are fair, transparent, equitable, and simple, and GST has been found wanting on at least some of these parameters, if not all as some argue.

The second has to do with the political and economic aspects of federalism. By signing off on GST, Indian states gave up their sovereign right to tax (mostly). Their share of revenue from the Centre was expected to suffice; but there is a category of special taxes that doesn’t go into the shareable pool of revenue, resulting in states receiving less than their fair share. Meanwhile, welfarism has emerged as a sure-fire way to garner votes — witness recent schemes across states as diverse as Jharkhand and Maharashtra and Karnataka — adding to the burden on state exchequers.

States that are governed by a political dispensation not aligned with the Centre also have to deal with a competitive aspect. Many of the Centre’s welfare schemes are in subjects that fall in the so-called state or concurrent list, and they cannot derive political mileage from them. The result is an uneasy equilibrium in the GST Council, with the states happy to increase tax rates, tax more products and services, and make the tax regime more complex — as long as it means more revenue for them to fund their welfare schemes.

A concerted effort to rationalise and simplify the tax regime, and an honest debate on fiscal federalism and the politics and economics of welfare (the first cannot happen without the second) are called for. Without these, belt up for more complexity.

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