Realist, not conformist analysis of the latest financial, business and political news

Extremely Sensible – Jaitley Says India Will Move To Single GST Rate

Arun Jaitley has intimated that India will try to move to a single GST rate – somewhere between 12 and 18% – which is an extremely sensible idea. There is no particular reason why government should be favouring the consumption of some goods or services over others so all should be taxed at that same rate. As to why taxing consumption, well, it’s necessary to tax something because government itself is necessary. No, not everything government does, nor even most of the things done by most governments but some really is necessary. Thus tax revenue is required to pay for it all. Consumption is just one of the less bad things to tax to generate that revenue – less bad than incomes, companies or capital but worse than land.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] After a massive rate rationalisation on Saturday, bringing several items into lower GST rate brackets, Finance Minister Arun Jaitley has now given an insight into the future of the indirect tax regime said that 12% and 18% tax brackets may be merged into one. He said that India will eventually have a standard tax rate, which can be created by merging 12% and 18% tax rates, for commonly used goods. However, this does not mean a single GST rate. Essential items will continue to be taxed at 0% and 5%, while luxury, sin and demerit goods will attract a higher tax rate. [/perfectpullquote]

Do note that condition there, a single standard rate rather than just the one rate:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] India should have three broad tax slabs of zero, 5 percent and a standard rate, which will replace 12 and 18 percent Goods and Services Tax (GST) rate, finance minister Arun Jaitley said today. As an exception, luxury goods such as big cars and demerit goods such aerated drinks and tobacco products, could be taxed at a higher rate. [/perfectpullquote]

It’s almost certainly true that using GST – really, a VAT system – to tax those very bad products is the wrong way to do it. Excise taxes are better here.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Finance minister Arun Jaitley on Monday said the next stage of reforms of the goods and services tax (GST) would see the standard rate converging to around 15%—the midpoint of the existing standard rates of 12% and 18%. If indeed this happens, India will have all but achieved the idea of “one nation, one tax”. At present, the transition to GST has ensured “one commodity, one tax”—unlike in the preceding regime where each commodity would attract up to 17 taxes. After the rejig of rates on Saturday, 97.5% of commodities are taxed at 18% or less.[/perfectpullquote]

Simplification of the system having been the aim and point of the GST itself in the first place. And yes, moving to a single standard rate would be just a continuation of that simplification and thus a good thing.

What would be even better is a proper simplification to just the two rates. Zero, for consumption that we’re not even going to try to tax – rice, say and just as an example – and 15% for everything else. But as with complication itself, there’s only so much simplification that people will put up with at any one time.

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Jonathan Harston
Jonathan Harston
2 years ago

“luxury goods such as … aerated drinks”
Aerated drinks? Y’mean fizzy pop? “luxury”???

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