Multi-tiered GST structure may create numerous classification problems
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The goods and services tax (GST) council has finalized a multi-tier GST rate structure. Items of mass consumption will be levied 5% and luxury and sin goods will be charged 28% plus cess. In between are two standard rates of 12% and 18%. As Vijay Kelkar and V. Bhaskar pointed out in this newspaper, the effective number of rates can well be more than just four. The multi-tiered structure will create numerous classification issues in a rapidly changing economy with entrepreneurs innovating with their products and services on a daily basis. Further, this structure is more likely to produce rent-seeking opportunities and less likely to encourage compliance.
The most crucial point, however, is that the desire to maintain revenue and the previous tax rates has undermined the transformative potential of the GST. If the GST fails to deliver its promised benefits, it will only create political obstacles to the cause of economic reforms in the medium term. The hard work of more than a decade is at risk of significant dilution.