The decision of the GST Council to reduce rates on 88 items, including goods such as televisions, washing machines and refrigerators, from 28 per cent to 18 per cent, in what marks the fifth round of rationalisation of rates since the new indirect tax was introduced last July and to mandate only quarterly, not monthly, filing of returns for business turnover of up to Rs 5 crore, is welcome. It’s an indication that the new tax regime has slowly stabilised and that revenues from GST are on the upswing — with average monthly collections which were close to Rs 90,000 crore last fiscal rising having topped the Rs 1.03 lakh crore mark in April, making the choice easier for the Council. These tax cuts effectively amount to a fiscal stimulus. A stimulus of this kind — which will help boost private consumption — is arguably more effective than Keynesian public spending that relies on indecisive government departments and state-owned enterprises.
A fiscal stimulus through tax cuts will, moreover, pay for itself as the perceived revenue losses through lower GST rates will be more than offset by increase in the quantum of private purchases given the likely boost to consumer spending — a far more effective growth driver in an economy like India than public spending with its inherent limitations of state capacity. But a levy of 28 per cent on a universal building material like cement when the rates on other products such as paint, varnish and wall putty have been slashed from 28 per cent to 18 per cent does not appear to be justified. Chief Economic Advisor Arvind Subramanian had said that the first step to rationalisation of GST was to do away with the tax slab of 28 per cent and to have a uniform rate of cess. That has been heeded, but not fully. Fears of a revenue loss may have prompted the Council from taking such a step but surely a reduction in the rate on cement would have been compensated by higher volumes as we have seen in the past.
Over the next one year, the GST Council and the government should work on further lowering of the 18 per cent slab to a standard rate of, perhaps, 16 per cent, a little above the preferred revenue neutral rate of 15 per cent suggested by an expert committee in the run-up to the roll-out of GST. That should be followed by a collapsing of the slabs to three from the five broad categories now — 0, 5, 12, 18 and 28 besides 0.25 per cent for rough diamonds and precious stones and 3 per cent for gold and silver. The GST is truly reformative and bound to be this government’s legacy. But to ensure that it is a Good and Simple Tax in practice, it is important to address some of these issues.