Last week, during the confabulations of the goods and services tax (GST) council to thrash out a rates structure, Haseeb Drabu, the finance minister of Jammu and Kashmir, made a telling comment: “We should evolve modern tax categories that reflect contemporary consumption trends.”
As always, Drabu was spot on. The existing edifice of classification of indirect taxes was created in a vastly different era; on the other hand, the proposed GST, which subsumes every existing indirect tax for almost all goods and services, is being conceived in a vastly transformed India, particularly in its consumption standards. First off, as data from the National Sample Survey Office shows, there is now a convergence of consumption habits between rural and urban India. In fact, it has been this new kind of rural spending which has sustained the consumer boom for fast-moving consumer goods.
Second, as Census 2011 showed, there has been a material trading up for most of India (manifest in the sharp decline in official levels of poverty from forty-odd percent to a little over 20%).
Third, technology and opening up of the economy have enabled lower prices, making it possible to deliver even goods such as cellphones as items of mass consumption. And going forward, this trend will only accelerate as we look at 24x7 power (deadline is 2019) and cooking gas for all (including for those below the poverty line under the Ujjwala Yojna scheme).
Fourthly, largely as an outcome of the preceding three reasons, the middle class has burgeoned—with the fastest growth in the lower middle class. There are various estimates—200-400 million. But suffice to say that the middle class in India is bigger than the combined population of some European nations.
Consequently, as Drabu points out, the classification of goods in GST—on what should be taxed at what rate—has to reflect these fundamental changes to consumption habits. Essentially, reflect the growing presence of the middle class.
The existing indirect tax structure does not do so. And understandably so, given it was conceived in an era where so-called conspicuous consumption was shunned and poverty was celebrated by politicians. And we have to keep in mind that indirect taxes are the most regressive form of taxation—the impact worsening as you go down the income ladder.
The new GST structure has to make a break with the past, because many items of yore are now mass consumption habits. Retaining the old structure will mean denying the aspiration quotient or, at the least, unfairly raising the cost of it. So, in the 1990s, the cell phone was a symbol of affluence; today, it is a convenience we can’t do without (Whatsapp groups are crucial for part-time plumbers, electricians, etc., to seek out jobs). Same is the case for television, toilet soaps, gas burner, refrigerator and electric fans. Unfortunately, the existing incidence of indirect tax on all of these items is 29%.
Surely, this has to change.
The initial work in the reclassification of goods will be carried out by bureaucrats (but as we all know, many of them are relics of the past who may miss the wood for the trees, especially since they are at present focused more on revenue). In this, it is only apt that the GST Council, made of state finance ministers and headed by finance minister Arun Jaitley, will take the final call. The new classification has to not only reflect the current consumption habits, but also look ahead as material affluence gets shared among more people. This is a political call and cannot and must not be taken by the bureaucracy.
In the final analysis, it is clear then that the country’s consumption habit has undergone a fundamental transformation. The roll-out of GST is a great chance to officially record this change.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus
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