Govt says need to have 4 GST rates; may reduce number later

THE IDEAL GST HAS JUST ONE RATE OR TWO. BUT SENIOR FINANCE MINISTRY FUNCTIONARIES BELIEVE THAT A SINGLE RATE, OR TWO, WOULD STOKE INFLATION

The government believes there is no option for the country but to have four rates of the goods and services tax (GST), though in time it might look at reducing the number.

The ideal GST has just one rate or two. But senior functionaries of the finance ministry believe that a single rate, or two, would stoke inflation. And there is the task to protect the revenues of the Centre and the states. That is a combined ₹8.8 lakh crore, divided equally between the Centre and states.

As the rollout of the GST enters the home stretch, some have questioned the rationale of having four rates – 6%, 12%, 18% and 26%. There is also a zero rate, a rate of 4% on gold, a demerit rate on certain items such as alcohol and cigarettes, and a cess. That, say critics, defeats one of the purposes of the GST, which seeks to create a single market and simplify the current system mired in a plethora taxes.

A wide range of rates may lead to disputes over classification: which item or service should be taxed at what rate. For instance, should a refrigerator or a television be taxed at the same rate as air-conditioners? All three are consumer durables, but refrigerators and televisions are bought even by low-income groups, though air-conditioners remain toys of the relatively rich.

Whichever country has a high dependence on indirect taxes – India, where only a handful pay income tax, is largely dependent on indirect taxes such as sales tax, excise, and customs duties – the number of tax rates is large. European countries have a standard 20% GST rate, but two to three other rates. Nearly all of them tax alcohol, cigarettes, and petroleum products at a much higher rate.

But India, said the finance ministry functionaries, could not do without the four rates. “We have to have a 6% rate to protect the poor. There are many consumer items, such as edible oil and tea, on which there is no excise duty, only a value added tax. These are consumed in large volumes,” they said.

So, they should be in a slab lower than the 12% rate, which some wanted to be the standard rate. Putting them at zero will lead to a massive loss of revenue, and putting them at 12% will make them very expensive.

For India 18% is the standard slab. And then there is the 26% rate, which applies to most of the items – among them consumer durables and FMCG – which now have a total tax incidence of close to 30%, including excise and value-added tax.

Some officials expressed the hope that with time the 26% slab may become the one for demerit goods.