All you wanted to know about merit and demerit goods

Finally, the GST is inching closer to reality with the Centre and State governments arriving at a consensus on the actual rates to be levied. The structure hammered out last week has four slabs — 5, 12, 18 and 28 per cent. Apart from this, four ‘demerit’ goods — high end cars, pan masala , aerated drinks and tobacco products will be taxed at 40 per cent to 65 per cent, inclusive of a cess.

But hey wait! Wasn’t GST supposed to be about one nation, one rate? Where did these multiple rates come from? Well, while every product or service will attract GST at one uniform rate across the nation, different products or services will end up paying GST at different rates, based on whether they are ‘merit’ or ‘demerit’ goods.

A merit good or service is something that adds to the welfare and well-being of society when it is produced and consumed. Take a pharma company producing a vaccine to inoculate children against Hepatitis B. That will clearly mean better health for citizens and a more productive workforce.

This is a clear example of a merit good, the production of which the Government will want to encourage. Demerit goods or services, in contrast, are those known to cause clear harm when produced and consumed. The GST Council has bracketed four items into this category — high end cars, pan masala , aerated drinks and tobacco products. Consuming pan masala and tobacco products have serious negative health implications, aerated drinks have low nutritional value and high end cars guzzle fuel and cause environmental harm. This is probably why these goods have been bracketed under demerit goods.

With four slabs in place (five, if you include the zero slab), the GST rates will depend on whether the government brackets them into the ‘merit’, ‘demerit’ or neutral category. According to last week’s deliberations, essential ‘merit’ goods may get taxed at a GST of 0 or 5 per cent. Most other goods and services will get taxed at standard rates of 12 or 18 per cent, and a items such as consumer durables (not expressly classified as ‘demerit’ goods) are likely to fall in the 28 per cent bracket.

However, the four specifically identified ‘demerit’ goods will be taxed at much higher rates than even the top GST slab of 28 per cent, with a cess being added on to the basic tax on these items. The cesses, expected to last for five years, are expected to fetch the government ₹50,000 crore in additional revenues. So how do you know if a good or service you’re buying, is deemed ‘merit’ or ‘demerit’? Well, this classification and the actual rate applicable, will become clear once the GST Council releases its item-wise list of rates for goods and services.

If you expected GST to result in just two or three rates across goods and services, you will now have to contend with more than half-a-dozen rates, thanks to the slabs and the add-on cesses on demerit goods. But then, having different GST rates for merit and demerit goods/services does help the government dis-incentivise production and consumption of certain undesirable goods. The additional cesses so raised can bolster the exchequer, may help ease the aam aadmi’s direct tax burden and free up more cash for developmental projects.

There is merit in taxing demerit goods.

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