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Tuesday, August 04, 2020

Too many taxes

GST council needs to reexamine indirect tax architecture, reduce exemptions and tax slabs

By: Editorial | Published: June 16, 2020 4:10:11 am
Too many taxes The promise of doing away with the multiplicity of taxes at the central and state levels was one of the most appealing aspects of the new tax regime.

In yet another instance that underlines the continued complexity of the indirect tax regime in India, the Authority of Advance Ruling, Karnataka, has differentiated between a parota and a chapati for the purpose of levying of GST taxes. The authority has held that frozen (and preserved) parota, wheat and Malabar, sold in ambient and frozen form with a shelf life of three to seven days, is distinct from a khakhra or a chapati. The former will attract a GST rate of 18 per cent, while the latter is taxed at a lower rate of 5 per cent. In shifting to the GST architecture, the hope was that switching to fewer tax slabs would put to rest such problems of classification that had plagued the erstwhile indirect tax regime. But, as instances such as this one underline, in practice the new indirect tax regime has been neither as “good” nor as “simple” as was initially touted. The tax system continues to remain complex and complicated. And instead of the promise of “one country, one tax”, the country still has a plethora of tax rates.

The promise of doing away with the multiplicity of taxes at the central and state levels was one of the most appealing aspects of the new tax regime. It was argued that the reduction in the number of tax slabs would, by putting an end to classification disputes, reduce the discretionary power of officials and cut down rent-seeking, making the tax system simpler and hassle free. Part of the complexity stems from the government’s desire to ensure a progressive indirect tax system, rather than ensuring the progressivity of the tax as a whole. Now, rulings such as the one in Karnataka may well end up encouraging businesses to push for more clarity on classifications, bringing more such issues to the fore, thereby increasing bureaucratic discretion, instead of reducing it, and opening the door for more rent seeking, not less.

At various points over the past few years, there has been talk of rationalising the tax structure, and moving towards a fewer number of tax slabs. But inadequate progress has been made so far. The GST Council must deliberate on resolving these issues. The tax system should be moving towards fewer exemptions, and even fewer tax rates.

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