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GST: Cut the rate, extend coverage
April, 12th 2017

Most goods (nearly 70%) will reportedly attract a goods and services tax rate of 18%. This is welcome. This rate is less than half of the current cumulative burden of indirect taxes on goods. Consumers will gain as most of these taxes will be subsumed under GST, cutting out the cascade of multiple levies that products bear, and lower retail prices. Most services should also attract the 18% rate when all taxes levied on goods and services are collapsed into one.

It is more than the so-called revenue-neutral rate — one that would leave revenues no worse off — considering that the combined tax collections of the Centre and states are about 17% of GDP now. Of the total collections, corporate, personal income and customs fetch about 7 percentage points of GDP, and the taxes that would be subsumed under GST yield about 10% of GDP.

Globally, the average VAT rate is about 16.4%. So, increasing the coverage of GST will make it possible for the Centre and states to lower the rate.

India will have a fourtier GST structure with rates ranging from 5% to 28%. Rates can converge when exemptions are removed and all goods and services are steadily brought under the tax net. It will also declutter the tax system. Regrettably, a large chunk of the economy, which includes real estate, electricity, alcohol and petroleum products, is out of GST.

This breaks the GST chain — wherein manufacturers get credit for the taxes that they pay on inputs — and increases scope for evasion. The GST Council should swiftly bring the excluded items also under GST.

Sensibly, the health ministry wants all tobacco products that include biris (beedis) to attract the highest tariff of 28% and a sin tax component of 15% that will not be eligible for input tax credit. The idea is to generate revenues and penalise a health hazard. Hefty taxes on cigarettes have restrained their use, but increased consumption of tax-evading smuggled cigarettes, besides of other tobacco products, some of them more harmful than cigarettes. The GST Council should just not heed to demands for sector-specific concessions.

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