Can a nation with an extremely diverse and dissimilar set of States amicably transition to a ‘one nation, one tax’ GST regime is the $250 billion (of indirect taxes) question?
1. Goods and Services Tax (GST) Council = future of India’s cooperative federalism in cementing the economic unity of India on a seemingly shaky pluralistic foundation.= comprises representatives of the 29 States, two Union territories, and the Finance Minister along with his deputy = 33.
2. Rainbow nation : • Reconciling diverse preferences of all the member States(from different educational, cultural, socio-economic backgrounds ) of the GST Council to determine a uniform set of indirect taxes across the nation is a ‘Mangalyaan’ task.
3. Removing some 3-misplaced notions around GST: A. The revenue neutral rate (RNR) i.e. , to predict how tax collections will be in the short and longer term , profit or loss - = cannot be determined in reality= utopian chase. B. Fear of loss of revenues to large States due to a lower GST rate is exaggerated. C. High GST rates will not affect the poor since half of the consumption basket is not taxed = is a false notion. Why? Assumption, that the government knows precisely what the poor and rich consume, is bizarre and outdated. eg : Regular biscuits is an ‘essential’ good and is not taxed while cream biscuits is a ‘luxury’ good that is taxed at the highest rate. Meat may be a ‘non-essential’ food item for the poorer Bihari but ‘essential’ for a richer Keralite.
4. Five guiding principles : I. One, forget RNR, instead guarantee a minimum for each State : Every State can be guaranteed a minimum combined GST (Central and State GST) revenues for a period of five years or a State election, whichever is earlier. This minimum revenue formula should include all of the State’s 2015-16 non-petroleum, non-sin goods indirect tax revenues. II. Two, A simple and low standard GST rate should be set to incentivise tax compliance and boost overall tax collections =to minimise overall inflationary impact, the standard GST rate slab should be 15 per cent, equal to the current services tax rate including all cesses. III. Three, no more State-specific tax incentives; increase threshold for exemption : A uniform GST will remove the States’ ability to attract new businesses with tax incentives, there is an understandable fear of new job creation in the more developed States. IV. Four, minimal categories of exemption: Petroleum and petro products along with sin goods such as alcohol and tobacco. With a guaranteed minimum GST revenue for each State for a certain period and an overall low GST rate, it is in both the interest of the States and the Centre to then not allow for any more goods or services to be exempt from GST. V. Five, incentivise States for GST collection. GST is a destination tax concept, it is best to give each State the greater responsibility to collect both Central and State GST taxes within its State. The more the States collect, the more they get back.