GST Reforms: making indirect taxes even more indirect and invisible

Some sectors will benefit, although energy costs go up for everyone, and fundamental reform has been postponed

GST reform: making indirect taxes even more indirect and invisible

Most of us have heard the tale of the mouse who turned into a maiden but was finally happy to turn back into a mouse. The maiden’s foster father sought a groom for her, identified the sun as the most powerful and eligible candidate, but changed his mind after seeing the sun being blotted out of the sky by rain clouds, whose power, however, seemed exceeded by that of the wind, which blew the clouds away. But the wind was blocked by the mountain. The mountain, however, could not resist a mouse that could burrow into it. The father turned the maiden back into a mouse and married her off to brave rodent.

Something like that has happened to India’s GST. The Prime Minister promised to turn India’s Goods and Service Tax from six-slab beast into a two-rate beauty. At the 56th meeting of the GST Council, the reforms they adopted have turned GST into a five-slab fiend. The zero percent, 3% (for gold), 5%, and18% slabs stay intact, the 28% slab has been replaced with a 40% slab, while the 12% slab has been done away with. The mouse has transformed back to a mouse, minus the tail.

But does such an assessment take into account the reduction in rates on a number of goods and services? Alongside these reductions, there has also been a steep increase in the cost of energy via GST rate hikes.

Coal is to be taxed at 18%, instead of at 5% as at present. Sure, there is a levy, at present. Of Rs 400 a ton, alongside the 5% GST. But this levy will disappear sometime this calendar year, according to the finance minister, as all loans taken to pay the states compensation for lost revenue are paid off.

But the 13% increase in GST on the coal that underpins India’s electricity generation will stay, and add to every kind of cost. Since electricity has not been brought under GST, and suffers electricity duty, on which input tax credit cannot be claimed, the additional cost of power would reflect the totality of the additional cost in the price of coal, and inflate every cost that Indian producers and exporters incur.

The cost of petroleum fuels is also slated to go up, thanks to the increase in the GST rate on the service of transporting crude and refined products by pipeline from 12% to 18%, and increased GST on job works done in relation to not just exploration and development of oil fields, but also production of oil. Once again, there is no GST on fuels, so that the full increase in costs will be passed on to the oil marketing companies. These companies have an opaque system of pricing fuel, as they stagger the impact of global crude price changes over months. So customers will experience an increase in the price of fuels at the fuelling station, without being able to pin the blame on GST hikes.

Visible rates have been reduced, while rates whose impact is not directly observable by the consumer have been increased. Indirect taxes have been made even for indirect.

While the removal of inverted duties in the textile and fertiliser sectors is welcome, the government has created new ones, with exemption of several sectors, whose inputs bear GST, ranging from dairy to manufacture of pencils. The duty on pulped or most other forms of wood has been brought down, but still remains at 5%. The duty on pencils is zero, giving the manufacturer no scope to set off the taxes paid on inputs against the tax paid on the finished product.

The GST Council has forgone an opportunity to properly define luxury goods, distinguishing them from premium goods. Now, these two categories stand conflated, and are taxed at 40%. Luxury goods should properly be defined as goods, whose demand goes up when their price goes up, because their exclusivity appeal goes up for the elite.

The GST Council has raised the e-commerce sector’s tax burden, by raising the GST on delivery services to 18%, from 5%, and obliging the e-Commerce platforms to levy reverse charge on small couriers, who fall below the GST threshold. At the same time, it has promised to create a simplified mechanism for small companies that sell on these platforms to avoid having to register separately in every state where their products are sold.

The reduction in rates on widely consumed goods is indeed welcome. But this has been accomplished while raising the cost of energy across the board, and clubbing premium goods with luxury goods, and making them unaffordable for many.

Most Indians live with incomes that make them spend most of their disposable income on consuming something or the other. If they save some money on a few items, the additional spending power would also be spent on something else. Consumption would go up, including on premium goods. Whatever is consumed would give the government GST. Therefore, there is little chance of any significant revenue loss.

The biggest reform GST needs is to mandate payment of GST via the RBI’s e-Rupee, a digital currency on the blockchain. That would make all payments transparent and traceable, putting an end to all input tax credit fraud, and the need to have e-Way bills while goods are transported.

This, of course, has not been the last opportunity to reform GST. The Council should do a better job the next time around.