GST challenge

Former finance minister P Chidambaram has a point when he and the Congress party insist that the GST rate should be written into the Constitution. Never mind that his UPA government did not feel the need to do so when it drafted the Bill to amend the Constitution to usher in GST. The argument against putting it is that it will make the tax regime rigid, leaving no room to adjust the rate in response to economic cycles. It is also argued that the action will does not augur well for the federal structure where States have the powers to fix and levy certain taxes.

Lack of flexibility to change GST rate at will can be good for the country, business enterprises and consumers as it will ensure rates stay stable for a few years. It can ensure greater uniformity across the country for goods and services unlike now where there are some instances of inter-State variation in the value added tax on specific goods, despite agreement on the rates. This lack of flexibility may also prevent States from distorting the tax structure, and thus limit diversion of trade from one State to another. These objectives can be achieved only if specific standard and concessional tax rates, instead of a band, are prescribed.

Keeping the rate low makes sense. GST is an indirect tax and can be regressive as it hurts those with lower incomes. Therefore, when economic cycle turns and governments need to boost tax collections, increasing GST rates can reduce consumption by those with limited income. As Chidambaram said in a television interview to mark 25 years of liberalisation of the economy, income-tax is a better tool to raise more taxes from the rich — if it is administered effectively and evasion minimised. However, the inability to administer income tax effectively cannot be a justification to increase tax on consumption.

Senior Deputy Editor

COMMENT NOW