GST rates: How many is too many?

One of the misplaced critiques of the Srinagar Consensus is that there are too many rates on the GST (goods and services tax) system. These, it has been alleged, will create confusion, lead to compliance problems and effectively go against the grain of GST itself. There should be only one tax rate, applied to all commodities across the board and not four as were cleared by the GST Council in Srinagar on  May 18, 2017. The press release after the meeting had said: “The Council has broadly approved the GST rates for goods at nil rate, 5%, 12%, 18% and 28% to be levied on certain goods”: In a line, the criticism of the Council clearing four rates --- five, if you count exempted items as 0% --- instead of one has been articulated as a break away from ‘one country, one tax’ idea that was envisaged while drafting the law.

This criticism is misplaced on three counts --- a dissonance with the philosophy of GST, a lack of awareness of global trends, and a sublime ignorance of the rights and responsibilities of sovereigns to deliver tax policy that is compliant with ground realities of their jurisdictions. There are several other reasons to critique, even condemn, the GST Council, as I will be discussing in future commentaries but the Council’s decision to have five rates is certainly not one of them.

First, the GST regime is a tax system, not a tax rate. The rates flow from this system through the combined efforts of the Centre and States through the GST Council. GST is a tax on the value added by an economic agent to the production of a good or rendering of a service. The confusion, perhaps, comes from two terms --- the standard rate and the revenue neutral rate --- that give the impression that these two would be the only rates. The standard rate is the most common rate that has been fixed at 18%, while the revenue neutral rate is one at which the transition to GST would happen with minimum loss to the Central or State government finances, whose contours will emerge only after four to six quarters of tax collection. It does not mean a single rate.

Second, the five rates are in tune with global practices --- India is not an outlier, it is not a country of economically regressive or fiscal illiterates. Among equals, apart from a standard rate of 17%, China has six rates (exempt or 0%, 3%, 5%, 6%, 11% and 13%), taking the total number of rates to seven. Brazil has two ranges of tax rates (0% to 35%, and 0% to 365%); and two fixed rate ranges (3% and 7.6%, and 0.65% and 1.65%); and three standalone rates (4%, 7% or 12%). Canada has five (0%, 5%, 9.975%, 13%, and 15%). France has five rates (0%, 2.1%, 5.5%, 10%, 20%), so does Italy (0%, 4%, 5%, 10%, and 22%). Switzerland has four (0%, 2.5%, 3.8%, and 8%). The Russian Federation has three (0%, 10%, and 18%), as does the UK (0%, 5%, and 20%).

On the other side, there are jurisdictions with few rates. Australia has two (0%, and 10%), so does Denmark (0%, and 25%), Indonesia and South Korea (0%, and 10%), Saudi Arabia (0%, and 5%), New Zealand, Nigeria, Singapore, Thailand and Mexico among others. Germany has three (0%, 7%, and 19%). There are countries that have more than one standard rate, including Egypt (13%, and 14%), Ecuador (12%, and 14%), Maldives (6%, and 12%),  Austria (19%, and 20%), and Pakistan (17% for goods, and 14% to 16% for services). The same tax --- GST or value added tax (VAT) --- has varying expressions in different countries. India’s five rates, therefore, are in tune with global trends, neither are the five rates unusual nor an aberration.

Third, even if it was, each country has requirements unique to its culture, economy, demographics, range of inequality and several other parameters that it needs to take care of while expressing its fiscal narrative. One number might be attractive to economists, but it need not be the right approach for every country. The economy of Uttar Pradesh is about the size of Greece or New Zealand, that of Maharashtra around Austria’s or Thailand’s, that of Karnataka almost Portugal’s or Bangladesh’s. For a ‘one nation, one tax’ paradigm, the fiscal aspirations of these large States have to be blended into those of smaller ones. Further, the inequalities in our country are acute --- the tax on subsistence goods cannot be the same as those on goods for the affluent. There are several such layers that the minds of policymakers have to confront before converging on a series of numbers. And by giving voices to all States in deciding taxes, the GST Council has done just that.

Much of the criticism on rates is really about implementation of rates, it is about hurdles in compliance, it is about evasion, it is about taxes becoming unpredictable, it is about tying entrepreneurs up in knots, it is about complexity and the related errors that it brings. The argument is, if we are transiting to a more efficient tax system, surely it needs to be simpler. They are right. At the end of the day, the efficiency of a tax system to fill the coffers of government for it to be able to create public goods will depend upon the ease of compliance by taxpayers. If that fails, all grand policies and rates can become irrelevant. These are issues I will be exploring in future commentaries. But to say that fewer rates are better than many and based on that assumption the GST Council has not delivered what it was supposed to, is an unfair criticism of the Srinagar Consensus.

• Indian Economy
• America
• Bhutan
• The Pacific
• East and Southeast Asia
• East Asia
• GST
• Modi at three

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.