GST: It is a one nation, eight tax rate structure; but it isn’t bad one to start with

Now, we have a one nation, eight tax rates structure under the proposed Goods and Services Tax (GST). Here’s how the new tax structure will look from 1 July: There will be zero tax rate for essential items that is used by the common man--fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom etc. Then we have the 5 percent, 12 percent, 18 percent and 28 percent slabs as decided in the beginning by the GST council. With additional cess on luxury goods, there is a sixth slab. The seventh slab will be at 0.25 percent for the rough diamond and the eighth and final is for gold at 3 percent.

That makes one nation and eight tax rates. Also, there are exemptions for alcohol and petroleum products. It is not so bad, after all. Among the GST compliant countries, there are economies like Singapore where there is a flat rate. There are also countries like Indonesia where there is a multiple tax structure

For Indians, GST began as an idea of one tax rate across the country and hence the eight slab structure will make the final GST structure look like far from a perfect GST. Beyond the multiple slabs, there are confusions about potential trouble arising from the tax brackets into which nearly identical products and services will fall into. As this Financial Times report (read here) rightly points out, “curd and lassi will have a tax rate of zero but yoghurt — which many Indians consider as equivalent to curd — will be taxed at 5 percent. Dahi — a Hindi word often used to describe both curd and yoghurt — is not mentioned in the schedule.” That apart, there are concerns about the compliance process as well.

But, the fact India finally managed to get the much-difficult political consensus to take GST to the launch stage and managed to give it a final structure within the expected schedule, largely addressing the concerns of majority of the common man and industries is a good signal for India’s aspiring economy. Finance minister, Arun Jaitley, said in an interview with CNBC TV18, that a single rate would have been ‘disastrous’ given the complexity of an economy like India and the varying culture and character of different states.

Yet, there is room for improvement in the future. The rates can be narrowed down and consolidated at a later stage. In 2015, a panel headed by Chief economic advisor (CEA) Arvind Subramanian had proposed a three-tier structure fro GST. A concessional rate of 12 percent for public goods that concerns the deprived or weaker sections, a standard rate of 17-18 percent that would concern majority of items and a rate of 40 percent for luxury items and tobacco, aerated drinks and pan masala etc.

The fine tuning wouldn’t be difficult since the GST rate is not part of the legislation and is up to the GST council to decide. The big relief from the GST rate structure is that common man will be insulated from price shocks with most of the daily used items out of the high tax slabs. This will also likely contain the pressure emanating from GST roll out on the inflation—a big worry for the central bank and the monetary policy panel. But there are big positives. Global investors will finally see India cracking a major reform, albeit with inadequacies after a long period of time. All in all, even in the current shape, GST is still better than having no GST at all. It is a one nation, eight tax rate structure; but it isn’t bad to start with.