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A step backward on GST

A step backward on GST
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First Published: Thu, Jul 22 2010. 09 25 PM IST
Updated: Thu, Jul 22 2010. 09 25 PM IST
It has long been established that the transition to a single goods and services tax (GST) would have been a singular piece of economic reform that would bring the changes initiated over the last two decades to their logical conclusion. And not without reason: It would economically unify the country. Seen in this context, the decision of the Congress-led United Progressive Alliance (UPA) to dilute the parameters of what it had itself argued was a “good” GST tax is retrograde. What is worse, the proposal suggests a very defective architecture, which, if allowed, would do more harm than good.
To start with, the proposal flies in the face of a single GST. Given its distinction between goods and services, on the one hand, and items of mass consumption, on the other, there is the implication that the proposal is looking at a multiple rate structure—or actually about five rates. Further, it has, by suggesting differential rates—16% for items of mass consumption, 20% for other goods and 12% for services— proposed to tax goods and services differently. Not only will this distort the value-added principle of indirect taxation—in some cases, the inputs may attract a higher duty than the output—it will also invite classification disputes; people will tend to classify their goods in the cheaper tax slab.
Since items such as alcohol and petroleum products, which generate substantial tax revenue, have been left out of the purview of the proposed GST, the tax rate on commodities has had to be pegged at a high rate of 20%—a rate at which there is greater incentive to evade taxes. So far in the debate, only two of the three stakeholders have expressed their opinion. The consumers, and particularly industry, have reserved their opinion, or at least not spoken in public as yet. It is time they did, because a lot more is at stake for them as the country gears up to move into the next stage of growth, where a uniform tax regime would not be a concession, but a precondition.
Clearly, the government’s intent seems to be to manage the deadline than the ideal architecture. This is a mistake. Proceeding with a defective proposal would only do more harm than good. Maybe it is simpler to assume that the country is not ready for GST at this point, and suspend the initiative altogether.
Does the current GST structure need more thought? Tell us at views@livemint.com
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First Published: Thu, Jul 22 2010. 09 25 PM IST