Get it right

Vital that GST reform is designed in a way that spurs spending. Economy needs it

India’s proposed GST overhaul can spur demand in the festive season that starts in about a month. It can also partly offset the impact of Trump’s “penal” tariffs that have been estimated to shave off up to 0.6 percentage point from GDP growth this year. That’s why it’s important to get this overhaul right. Eight years ago, GST replaced VAT with the promise of a good and simple system. But there’s nothing good about taxing cream-on-toasted-bun at 18%, when cream and toasted bun are taxed at 5% separately. Nor can three different rates for popcorn – 5% for open, 12% for packaged, and 18% for caramel – be considered simple. These are only the most glaring distortions under the prevalent system. A quick glance over the list of GST rates reveals the bigger problem of classification into luxuries and essentials.

By any measure, 28% is an enormous cut for govt to take. It might be justifiable for cigarettes and other “sin goods”, whose consumption govt wants to discourage, but why tax cement at this high rate? Worn-out tyres are among the leading causes of accidents, yet new tyres are taxed at 28%. Why is tooth powder taxed at 12% but toothpaste at 18%? Soap is taxed at 18% across the board, making it a luxury for manual labourers who possibly need it the most.

The underlying principle of taxation so far seems to be revenue maximisation. Metaphorically, it amounts to squeezing the goose without killing it. With the proposed GST overhaul, India could transition to an economy that keeps the goose happy, stimulating it to lay more golden eggs. For example, taxing small cars at 18%, as against 28% now, could revive a segment that used to be the main driver of the car market until 2019. That’s why scrapping the 12% and 28% GST rates, and shifting most of the goods and services under them to the 5% and 18% rates, is welcome. But after offering relief on income tax in this year’s budget, nudging interest rates downward, and now reducing GST, govt will run out of options to spur demand. The problem of stagnant incomes is the private sector’s to fix. And it can, sitting as it is on record profits.

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