The unanimous vote in favour of what is now popularly known as the GST Bill in the Lok Sabha on 8 August and earlier in Rajya Sabha on 3 August (in both the houses the AIADMK members decided to walk out instead of opposing the Bill as they possibly did not want to spoil the rare bonhomie among all other parties) has been hailed as a historic event in India’s parliamentary history by the prime minister and a host of cheerleaders.
Should the common man celebrate the occasion? The answer is both ‘yes’ and ‘no’.
Yes, in so far as we, as a nation, inched forward towards an efficient indirect tax regime that promises to minimise the cascading effect of multiple taxes prevalent in the existing system.
Since all indirect taxes levied by the states and the Centre will be merged into one GST, we would exactly know how much tax we would have to pay which at present is too complicated for a layperson to calculate.
But it is an emphatic ‘no’ if you go by the intent of the powers-that-be — both the state governments and the Union government — about the standard rate of the GST. The Congress had insisted on a 18 percent cap to be incorporated in the Constitutional Amendment Bill. The Central government held forth that a taxation structure could not be a part of the Constitution; it should be an executive decision to be taken together by the states and the Centre in the GST Council.
The Central government, however, left no one in doubt that the standard GST rate would be pegged higher than the 18 percent that the Congress was bargaining for; it was a surprise that the Congress gave in and extended support to the Bill after putting up resistance for over a year. This decision had partly to do with its calculation that the NDA government would be able to muster a two-third majority in the Rajya Sabha even in the face of the Congress opposition (in the Lok Sabha the Congress support was not necessary as the government had the required numbers).
The Congress leaders did not want to be seen ‘on the wrong side of history’ when a momentous reform measure was being undertaken in our Parliament. That was enough evidence to show that the Congress was only playing small politics – not upholding a larger public cause – when it had decided to dig in on the 18 percent cap. It would have gone down in history as the upholder of the interest of the downtrodden if it would have stuck to the 18 percent demand and voted against the Bill – no matter that it would have found itself on the losing side. The defeated Congress would have, of course, faced the taunts of the NDA leaders and a host of commentators who earn their living by sucking up to whoever is in power, but that would have given it reasons to take pride in the fact that it has stood up for the Indian poor.
After all, GST is a regressive tax. It has a more pronounced effect on lower income earners – the tax consumes a higher proportion of their income compared to those earning large incomes. It is regressive to the extent that the proportion of tax paid relative to income decreases as income increases. That is why wealthier people spend a smaller portion of their income on goods and services compared to poorer people.
Income-tax is typically a progressive tax. There is a minimum income level at which one does not have to pay taxes. Everyone, however, is forced to pay taxes on goods and services, no matter what their income is. Income tax rates are graduated; the higher the income, the higher the tax rate on that income. Goods and services taxes stay the same, no matter what the income is.
That is why GST rate is important from the point of view of the poor. Think of people earning Rs 1 lakh or more a month; a tax of, say, 18 percent on the grocery bill may be bugger all for them. But imagine someone with an income of Rs 6,000 a month; an 18 percent tax on his grocery bill would gouge a huge hole in his monthly budget.
An Australian study that analysed the consequences of raising the GST rate from the current 10 percent to a proposed 15 percent had this to say: the move would have people in the lowest 20 percent household income bracket pay 6.7 percent more of their income in GST. Compare this with just 2.9 percent more expense for the top 20 percent while the middle 20 percent would have to pay 4.2 percent more. Sensitive to the condition of the poor, the Australian government dropped the idea of raising the GST rate.
Fairness demands that the standard GST rate in India should be as low as possible. If it is just 6 percent in Malaysia, 7 percent in Thailand and Singapore, 10 percent in Indonesia and Australia and just 17 percent even in a totalitarian country like China, why can’t we set a maximum limit of 18 percent, which itself is unconscionably high. (Ideally, the GST rate in India should be a world average of 12 percent).
But look at what our Shylockian leaders are proposing. The Times of India reported that the State finance ministers are clamouring for fixing the standard rate of the GST at 27 percent. The Union Finance Minister lent credence to such a view when he said: the combined impact of central excise and value added tax is in the region of 27 percent. In some states, it is as high as 30 percent due to local surcharge. While fixing the GST rate, this fact must be kept in mind.
The finance minister was clearly economical with the truth. His government’s chief economic adviser (CEA), Arvind Subramanian, had earlier rubbished such talk of existing 27 percent tax as misleading. “The combined tax of 27 percent is on manufacturing only. You just can’t look at one component” and generalise it for the entire taxation structure, he had said. The CEA, in his report, had pegged the revenue neutral rate at 15-15.5 percent (it means that the states and the Centre will earn the same revenue they are earning today if the standard GST rate is fixed at 15 percent); the CEA, in fact, had warned that a standard rate “higher than 18-19 percent would stoke inflation”. And he was candid enough to say that “at 27 percent, it (the whole idea of the GST) is totally self-defeating.”
Clearly, our politicians care two hoots for either equitable policy or economic rationale. All they are concerned with is the maximisation of revenue, even if it meant maximum burden on the poor who are least able to bear it. The Congress had a chance to prove that its heart yearns for the downtrodden. But it lost the chance in its chase for misplaced glory on the day of reckoning.