Public memory is usually short but the memory of taxation is even shorter. Benchmark brent crude might have tested an unprecedented low of $37 per barrel, but domestic petrol and diesel prices are still ruling higher thanks to heavy taxes. If only the debate on goods and services tax (GST) revolved around explaining this dichotomy, a viable tax structure could have emerged. Or, if only we had learnt lessons from the value added tax (VAT) roll-out during the last decade, we could have better fixed the shortcomings in tax structure. Now that the importance of having a common and uniform tax structure is obvious to all, it is time to expand the debate on GST to the perennial inconsistencies of India’s indirect taxation.
Moving ahead with GST by sweeping the debate on India’s lop-sided tax structure under the carpet can be dangerous at a time when India is gearing up for green taxes to curb ecologically damaging consumption and production. Green taxes will constitute congestion tax, pollution tax and green energy tax which are already being successfully experimented in countries around the world. Before implementing these new taxes, it is necessary to soften indirect taxes that inflate the cost of living and basic consumption.
The report of the advisor to the finance ministry has suggested a framework of a three-layered GST rate regime. The first 12 per cent minimum rate shows that the days of single digit Central and state rates of excise and VAT will soon be over. That is, a host of mass consumption products taxed at six to eight per cent will attract a 12 per cent levy. At the second level, the service tax will climb from the existing 14.5 per cent to 19 per cent. It is likely that a new tax will be introduced for petro products while luxury products will attract a tax rate of 40 per cent. State governments are yet to present their points of view on this. They may propose even higher tax rates which, in turn, would fuel substantial inflation over the next three to four years.
The concurrent tax structure of having a higher tax on consumption and a lower one on income is archaic. Despite several major reforms over the last two decades, we have not been able to make our tax structure modern, easy, and inspiring. Unlike the globally established principle of having a higher tax on net earnings and a limited tax on consumption, India keeps income tax and corporate tax lower, while taxes are higher on consumption as a result of a spate of indirect levies like excise, service tax and VAT. Concessions in income tax (direct taxes) benefit a small group of people while increase in indirect taxes dampens the consumption of a very large population.
Theoretically, a large tax base (a large number of taxpayers) necessitates a lower range of indirect tax rates. However, with the growth of economy, increased production, growing consumption and a bigger taxpaying population, indirect taxes and their rates (excise, service tax, surcharge, cess) have been increased consistently. On the other hand, even though income tax and corporate tax have been reduced, the number of people under the ambit of indirect taxes is still under four crore, which is only three per cent of the population.
Our experiences with VAT suggest that having a cap on the maximal GST rate is important. VAT was introduced in the states in 2005 replacing the state level sales tax system with a similar three-layered rates structure. However, within three years of its implementation all rules vanished with different states imposing different tax rates on the same product. In fact, consumer prices have been going up consistently in local markets as most of the mass consumption products have been elevated to higher slabs of VAT.
Owing to India’s commitment to global pacts, import duties in the country have declined fast, and to compensate for the same, budgets have milked excise and service taxes. This has led to costlier production in the country resulting in reduced industrial competitiveness.
Now that the government is mulling doubling the salary of ministers, the debate on taxation should begin with control over government expenditure, which has already shot through the roof thanks to populist experiments. Governments will have to limit their sizes and roles to get rid of taxation that shrinks consumption.
India is a nation of a plethora of taxes, which has throttled demand and dashed hopes of having a better standard of living. As the era of green taxes is looming, it is essential to confront the need of doing away with multiple and high taxation in the country before jumping to a new and increased structure of taxation via GST. We are running the risk of instituting a highly misaligned tax structure which may eventually demolish hopes of ease of doing business, demand and investment.