In one shot, the Goods-and-Services Tax (GST) Council slashed tax rates on a whopping 178 items letting everyone wonder whether populism is taking over prudence. It will be difficult to find a similar precedent in history, wherein a government of any country changed tax rates so rapidly and on such a high number of items.
It must be noted that GST was rolled out as recently as July 1, this year. Even before the roll-out, the BJP government at the centre was preparing for it for months. A lot of thought must have gone into it before July 1. It's tough to believe that in just over 4 months since the roll-out, the reality of trade of so many products has changed to such an extent that the very basis on which the tax rates were decided earlier itself was wrong.
The fear that populism is taking over prudence gets credence from the fact that GST inherently is a very complex tax structure. GST is based on input-tax-credit, which means that businesses can get their tax liability reduced to the extent taxes were paid by their suppliers. Keep this fact in mind when analysing reduction in GST rate of 178 items.
Let's take shampoo, for example. The GST Council has reduced tax rate on shampoo from 28% to 18%. However, this rate is only at the last leg of value chain, when shampoo is sold to an end customer by a retailer. Before the final leg, other GST rates must have been applied at various stages of shampoo manufacturing, which the government may or may not have reduced.
This makes consumers gullible because it's very tough to have a holistic view of taxation on a certain product. The government may slash GST rate to even 0% on a product and consumers will think it is tax free without realising that tax was paid at several stages of manufacturing before the product reached the retailer.
This is not to say that GST reduction on shampoo was a bad move, per se. Given the fact that shampoo is an item of daily use for millions of people in India, a tax rate of 28% was unjustifiably high. But, it is to underline the immense potential GST's complex nature gives to the government to make populist announcements.
One could even argue that this tinkering with GST rates was done while keeping an eye on the upcoming Gujarat assembly elections to an extent. Moreover, if tax rates can be reduced in a matter of months, it is very possible that they can be increased after a few months.
The central government must not forget that a stable tax structure is at the heart of a sound economy and therefore populism must be shunned especially when it comes to GST.
