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If the GST Council makes GST any more onerous, or raises taxes, it may not be worth it

Though the weekend meeting of the GST Council is not expected to finalise the rates at which individual goods and services will be taxed under GST, negotiations in the council are reaching a critical stage, and how they progress will determine whether India will have a good or a bad GST. Chief economic advisor Arvind Subramanian has, in this newspaper, made a last-minute pitch to get land and realty under GST – as he rightly puts it, this does not remove the state government’s ability to levy stamp duties but allows more tracking of transactions to check black money in real estate. While it is not clear if this concern will be taken care of, the peak rate of 40% being proposed – from the current 28% — is a big cause for worry. On the face of it, officials are saying this is just a precautionary move, to obviate the need for going to Parliament in case tax rates need to be raised, the idea of putting a 28% cap was precisely to ensure rates never went up – indeed, the lower the highest tax, the more the benefits from GST. It is true that, even now, goods that pay a 40% tax – excise plus VAT – will pay the same rate through the 28% GST plus a 12% cess. But while the cess is a temporary measure, putting a 40% rate in the statute could bind us to high rates. Even before this proposal, the top rate of 28% was problematic since, the way things look right now, over a fourth of the tax base falls in this bucket – Subramanian is on record saying, just recently, that if the 28% tax slab has more than 6-7% of the base, it would be disappointing and it will be a high-rate GST.

More worrying is the fact that the centre and states seem agreed on an anti-profit clause in the GST. So, if the GST rate brings down the current tax on a good or service from, say 22% to 18%, the difference has to be passed on to consumers. Imagine the harassment if tax inspectors are to examine a company’s pricing structure to see whether a tax cut has been passed on or not – if a cut is not passed on, this could be because inputs have become costlier or the company was absorbing some costs or any of several other reasons. Normally, markets decide on pricing structures and it is quite draconian to pass on part of the power to tax inspectors. Equally amazing is the proposal, in the first draft of the GST law, that allows states to issue some kind of documentation on the goods being transported that truckers need to carry in case they are stopped for checking. The idea behind GST was to stop border checkposts where such documents are verified right now, and where trucks waste precious hours while doing so, so why is this practice being resurrected? Given the reluctance of states to adopt GST, if finance minister Arun Jaitley wants the law to go through, it is true he needs to be a lot more flexible and accommodate state government demands. But, if the new law is going to be worse than what is there at the moment, you have to wonder whether it is worth all the heartburn.

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