Prime Minister Narendra Modi announced earlier this month that major GST reforms would be implemented over the next few months, resulting in only two slabs of GST: 5% and 18%, down from the current four -- 5%, 12%, 18% and 28%. This is a step in the right direction — provided it is rolled out effectively and without some of the head-scratching decisions that have plagued the current setup.
The markets have reacted positively to the decision -- and not without reason. The current GST set up is notoriously and needlessly complicated. There have been memes made about how similar items attract different rates of GST, with social media having a field day when it was made known that salted popcorn would be taxed at 12% but caramelised popcorn would be taxed at 18%.
But beyond the harmless fun being made on social media, there were other problems too. Why were essentials like health insurance taxed at 18% when it is already barely affordable for an average middle-class family? It is similar for (non-life-saving) medicines, which are taxed at 18% the same rate that beauty and skin products are taxed at. It is widely anticipated that the reduction in GST, while reducing the government’s revenue, will bring prices down and thereby help spur demand, which will in turn help the economy.
On the other hand, there are also questions about the government’s decision to do away with the 28% slab -- a slab that had many items on the pricier end of the spectrum -- including high-capacity cars and SUVs, medium to high-end motorcycles. Meaning these items are going to be priced in the same bracket as their more affordable variants, thus making them more attractive, while at the same time the government will lose the opportunity of generating revenue while also deterring purchases of high-end items that aren’t seen as necessities.
Ultimately, it boils down to being able to strike a balance, and historically, governments and bureaucracies have shown themselves to be incapable of simplifying things. What this means is that over time, we will get the worst possible combination -- a tax structure that complicates itself over time and a loss of revenue to the government.
The last major tax reform attempted by this government was when Union Finance Minister Nirmala Sitharaman announced a steep reduction in corporate income tax -- a move that ensured that the government would lose Rs1.45 lakh crore. However, despite the loss of revenue, the slashing of the income tax rate did not translate to growth in the economy or a boost in manufacturing.
It is a risk that this major reform is facing as well. Well-intentioned reforms can often get way-laid by unimaginative thinking, bureaucratic approaches, and a lack of a clear vision. One hopes that the current set of reforms brings relief to the common man as envisaged and is not held hostage to poor implementation. More than that, the government also needs to watch out for profiteering by companies that do not reduce prices on products despite a cut in the tax -- as that would defeat the entire purpose of the initiative.
