India’s most ambitious tax reform in decades is approaching a semblance of its original intent: a nationwide, uniform low-tax regime. The Goods and Services Tax (GST) Council last week reduced tax rates on 22 items, of which seven were from the highest slab of 28%, in line with Prime Minister Narendra Modi’s suggestions to ensure 99% of items attract 18% or lower GST, leaving merely luxury and demerit goods or services in the 28% bracket. That the council could not do more at this juncture—cement and automobile components still remain in the highest tax slab—is understandable, given the prospects of losing ₹ 33,000 crore in tax revenue. In the event, the council settled for changes in tax rates that are expected to have a ₹ 5,500 crore revenue impact in 2018-19. With this, the centre and states have moved a step closer to the ideal of a single standard rate GST. Finance minister Arun Jaitley hinted on Monday that the 12% and 18% slabs could eventually be merged.
Jaitley deserves much of the credit for pulling the states along in this mammoth endeavour and, as reported in this newspaper, his efforts at driving consensus are nowhere near flagging. Mint had reported that the centre proposes to extend the compensation to states for any shortfall in revenue because of the switch to the GST for three years beyond the five originally envisaged. The 15th Finance Commission will draw up the transfer mechanism till 2025 in an effort to ease building consensus in the GST Council, a daunting task at the best of times. This assurance, beyond the one provided constitutionally, will help the states shed any lingering reservations over losing their fiscal freedom and about the superiority of the non-cascading tax that is expected to bump up India’s economic growth once the creases—the GST Council at its latest meeting decided on the date for a new return-filing system and agreed to set up a centralised advance ruling authority—have been ironed out. West Bengal finance minister Amit Mitra, not a supporter of the National Democratic Alliance government at the centre, admitted as much, stating that the council’s decisions were rational, keeping in mind the fiscal reality.
The simple expedient of collapsing the GST rates and reducing its tax and compliance burden on the economy draws down a considerable amount of political capital to be made from opposing the new indirect tax regime. That this government, and Jaitley, in particular, has accomplished it in large measure, says a lot about the reformist credentials of the NDA. The GST has been a long time in the making in India—the government, on its part, has faced a fair amount of flak over a hurried implementation—but now that the dust is settling down, the abiding economic benefits of a self-policing tax should not be allowed to be held hostage by party politics.