Half full Half Empty GST Changes?

Newspapers are full of advertisements praising the Prime Minister for the so-called Diwali gift. Few analysts have come out with the real report card of GST. Convener of Association of Indian Entrepreneurs Mr. K E Rahunathan was critical and told the media that don’t celebrate without knowing the full details. Known as MSME Raghu he is one of the rare voices of MSME. He says MSMEs have very little to celebrate. The MSMEs require many other support like adequate credit, non-declaration of loans as Non-Performing Assets as new problems have come due to US tariff about which the Government had 7 months to take action but failed. He has demanded that the ceiling on turnover for GST has to be increased.

The Goods and Services Tax (GST) was introduced on July 1, 2017. When the Congress-led UPA II government wanted to bring GST, Mr. Narendra Modi, then Chief Minister of Gujarat and his party had opposed it strongly.
In the last eight years, 56 GST Council meetings have been conducted, but the views of opposition-ruled states are seldom accepted as stated by Mr. Thangam Thennarasu, Finance Minister, Tamil Nadu and other FMs of opposition-ruled states. Federalism is forgotten in many ways and GST Council is one of them.

Though claimed as “one nation, one tax,” it had seven different slabs. Tax slabs existed at 0%, 5%, 12%, 18%, and 28%, 3% and 0.25%. While it is widely stated that there are only two slabs now, a closer look shows otherwise. The so-called “standard rate” is 18% on the majority of goods and services; the “merit rate” is 5% on some goods and services; 0.25% applies to certain others; and a “demerit rate” (such as 40% SIN tax) has been brought in. Meanwhile, gold, silver, and even imitation jewellery have a 3% tax, and non-industrial diamonds and semi-precious stones are taxed at 0.25%. Clearly, calling it a “two-slab system” is misleading people.

Aerated water and all kinds of cool drinks are taxed at 40% which is the same rate for cigarettes and tobacco.

Few Positives

• Removal of 18% tax on insurance policies.
• Reduction of tax on some items especially eatables.
• Reduction of tax on certain medicines and exemption for 33 others.

North South Divide?

South Indian hoteliers have asked, ‘When paneer, khakra, roti, and paratha are tax-free, why not other daily food items like idli, dosa, puttu, vada, etc.?’ Even now, frozen meat, tea, coffee, vegetable products, edible grains and flours carry a 5% tax. Starch and insulin attract 12% tax. Daily-use food items like pig fat, chicken fat, oils, preserved vegetables and products are taxed at 12%. Vegetable wax, lactose, maltose, glucose at 18%. Bread and pastries 18%. Chocolate 18%. Butter, ghee, and cheese 5%. Medical-grade oxygen 5%. Glucometers and test strips 5%. Group insurance including for senior citizens is taxed at 18%.
Today, items like caffeinated drinks, carbonated drinks, and non-alcoholic beverages are taxed heavily. Paper and paperboard at 18%. Apparel above ₹2,500 at 18%, even apparel costing ₹1,000 is taxed at 5%. Is this a Diwali gift, Modiji?

There are 99 chapters in GST, and a taxpayer needs a chartered accountant to figure out what is taxed and by how much. Surprisingly, the tax on air conditioners has come down from 28% to 18%. TV sets above 32 inches are down from 28% to 18%. Dishwashers too, from 28% to 18%. If these can be reduced, why not waive taxes on food items consumed daily by the poor?

The states get only 50% of GST. So they are allowed to tax alcohol. Many states have become liquor sellers for revenue. Education which should be a public service is privatised whereas liquor which can be in private is sold by the government. Maybe, the rich should be encouraged to drink more so that the poor can get free education!

What is actually needed?

As per 2022–23 reports, only 2.2% of the population pays income tax. Half of them are regular employees whose tax is deducted at source. The rich, meanwhile, use rebates and chartered accountants to exclude income, or rather, evade tax.

Demonetization did not work, as many predicted. Income tax remains capped at 30%. So the richest in the country and lower-level government employees pay the same 30%. The employed cannot evade but the super-rich can. Even though the government has full data on the rich like the luxury cars, bungalows etc. they don’t catch them. Instead of misusing IT and ED, if genuine tax collection is done, income tax revenues would rise dramatically.

In addition, progressive taxation is needed; higher profits should mean higher tax. A wealth tax and inheritance tax, like in other countries (even capitalist ones), should be introduced. In the 1970s, India had an income tax rate as high as 97.5% after the Indo-Pak war, but the rich evaded it. It was reduced with a hope that a lesser tax slab will encourage the rich to pay tax honestly but they still evade tax.

What should be done?

In a country where 80 crore people are given 5 kilos of rice or wheat free, all agricultural produce, dairy and meat products, fruits, and drinks should be exempted from tax. The exemption limit of ₹40 lakh for small enterprises and ₹20 lakh for services should be raised to at least ₹1 crore (less than ₹10 lakh turnover per month). These MSMEs provide the bulk of employment in the country.

Petrol, electricity, and alcohol remain outside GST. On unbranded petrol, there is 2.5% BCD, ₹6 per litre AED, and a brutal tax of ₹21.48 per litre as central excise. On diesel, central excise is ₹17.33 per litre. Higher petrol and diesel prices increase the cost of every item due to transportation. This must be reduced. This will bring down the cost of everything.

With the hope that the rich will pay taxes honestly, the rich are taxed less but the numbers show otherwise. Corporate tax was reduced from 32% to 20% in the hope that investment and jobs would increase. That did not happen. If politicians and officers were not corrupt and complicit, the tax system would function effectively.

Look at Finland, Denmark, Sweden.

What is tax for?
Is the tax collected for the comforts of the rich including politicians in power? The poor are forced to pay more, through GST, petrol, gas, electricity, and even alcohol. Tax must be used to provide all amenities and social security to the citizens. Why is education not free? Why is healthcare not free?

In most of the countries, 30–40% of the population draws salaries from government, public sector, and public services. In India, it is only 3.2%. Why can’t the government employ more? That would mean more taxes collected and better services provided.

The benefits of oil import savings and GST reductions (for cement and other items) largely go to corporates, not commoners. Will corporates pass on the benefits of reduced GST to citizens? The government has no mechanism to monitor. Piyush Goyal only “hopes” they will, but past experience is discouraging.

The changes proposed by the Government effective from Sept 22 are not even a glass half full. What is needed is a total overhaul of the entire tax system.

Thomas Franco is the former General Secretary of the All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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