The four-tier Goods and Services Tax (GST) rate structure approved by the Centre and state governments last week marks a major step towards implementation of India’s most ambitious indirect tax reform. Economists and tax theorists may have problems with the multiple tab slabs of 5, 12, 18 and 28 per cent — not to speak of the zero-rate/exempt items or a separate cess to be imposed on tobacco, aerated soft drinks, luxury cars and pan masala. But the fact is, a functional GST Council is now in place. This Council, comprising finance ministers from all states, has been meeting and seeking to thrash out various issues to pave the way for a tax regime that will help build a national common market for goods and services. What seemed a distant dream of implementing the GST from April 1, 2017, not too long ago no longer appears so. Admittedly, the rates structure approved may not be the perfect start that purists would want, but the immediate need today is to get the GST rolling from the next fiscal. The corrections can follow later — which is how most reforms take place in India.
Having said that, there are genuine concerns that need to be addressed sooner rather than later. Among them are the potential disputes that could arise on account of the classification of commodities in the various slabs. Besides, how does one make a distinction between goods and services in activities — for example, construction or works sub-contracting — that involve both production and performance of a service? Also, will all services be taxed at the same rate, irrespective of the user? What would be the implication of a service tax rate of, say, 18 per cent on mobile phone bills or food purchased in restaurants? If foodgrains are to be zero-rated, what would happen to states like Punjab and Haryana for whom these constitute a significant revenue source?
Even when it comes to rates, a properly functioning GST with a seamless system of input tax credits requires a convergence of slabs, with few exemptions. Revenue neutral considerations may have influenced the final decision to have multiple rates, especially in the backdrop of sluggish growth that has strained the finances of most states. The finance minister and the chief economic advisor have said that the new rate structure would help ease inflation and that the proposed cess would help bankroll a new fund to compensate states for the potential loss in transition to the new tax regime over the next five years. There is bound to be criticism on grounds that an open-ended commitment to states like this could lead to moral hazard. But the decisions taken were unanimous. The design and structure of the GST may not be what it promised to be, but as the history of reforms over the last two decades shows, much of it has evolved on the way. Hopefully, in the case of GST, too, there will be similar course corrections en route and it will roll out as scheduled on April 1, 2017.