Towards a Single Less Tax Regime

In December 2018, the late Finance Minister, Arun Jaitley announced that the 28% GST slab, which he called the “dying slab”, would be phased out, except for luxury items. He said, India will eventually have only two slabs: 5% and the standard rate between 12% and 18% (except for exempted items). Tragically, he passed away less than a year before his assurances could be fulfilled.

Simplicity is not easy to achieve. Great sages, artists and designers have preached simplicity. It was the mantra of Henry David Thoreau that influenced Mahatma Gandhi.

The introduction of a uniform GST was a momentous moment in India as the country’s earlier system of taxes and cesses both at the Center and in the states was a major hindrance to free trade and economic development and a cesspool of corruption.

complicated and confusing

However, GST is still a complex tax regime with different slabs. It is not easy to understand or follow, and is open to interpretation, harassment and avoidable litigation. To make it easier, the officials of the Ministry of Finance will have to be reminded of KISS.

KISS (Keep It Simple, Stupid) is a well-known acronym and an acknowledged credit in business. Attributed to Lockheed aircraft engineer Kelly Johnson, it was intended to urge engineers to keep aircraft design simple enough that even a foolish person would be able to repair the aircraft with ordinary equipment on the battlefield.

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The bureaucracy across the world is generally oblivious to the KISS principle. An Amazon ad claims that it sells more than 10 million different products, in addition to a myriad of services. More categories are added every day. In this context, asking bureaucrats to identify and classify all products and services for differential tax slabs in the GST regime is the safest way to get into the mess.

The empirical data from around the world on the benefits of a unified single tax is indisputable. Therefore, a clear instruction to the bureaucracy is necessary to come up with only two categories: goods eligible for zero tax and goods that fall under a single rate, such as 10% or 12%. This means that everything is taxed except those specifically exempted.

For this, bold and clear reformist thinking is needed at the political level. There is no point in imposing higher GST in some areas. For example, ‘sin’ taxes are contrary to the government’s ‘Make in India’ policy of growth and employment generation. A typical 300-room five-star hotel generates direct employment for approximately 500 people, 90% of whom are waiters, housekeeping staff, front desk staff, security and concierge staff in addition to cooks, financial and clerical staff. Many others are employed in allied services such as spas, gift shops and swimming pools. The hotel also generates indirect employment in the ancillary sectors: it buys bed linen, furnishings, rugs and carpets, air conditioners, cutlery, electrical fittings and furniture, and consumes vast quantities of food produce. All these generate employment and income for farmers, construction contractors, artisans and other manufacturers. Five star hotels also generate foreign exchange by attracting wealthy tourists and visitors. Therefore, it is unwise to put these hotels to death.

Similarly, high taxes on air-conditioners, air-conditioned restaurants, chocolates and luxury cars create an economic ripple effect downstream in a complex web of businesses with symbiotic relationships. The effect eventually reaches to the bottom of the employment pyramid.

The plan should be how to revive the economy by spending the rich and upper middle class moving more people up the value chain so that more chocolates and ACs and automobiles can be bought by them, instead of designing a tax system. Of. Which keeps these products out of reach of the new consumer segment.

Instead, the current regime is plain confusing. At Iyengar Bakery, the GST on bread is nil, but vegetable sandwiches are in the 5% tax slab, which directly impacts the vegetable grower. The GST on buns is nil, but some raisin buns come in the 5% slab. The GST on Masala Groundnut, Murukku and Namkeen is 12%. On the other hand, the GST on cakes and chocolates is 18 per cent. The same lack of logic applies to taxes on wine, rum and beer, which generate massive employment and are the backbone of grape and sugarcane cultivation and the cocoa industry. The ancient art of toddy extraction, a major employment generator and income enhancer in rural areas, was killed by uninformed politicians and bureaucrats and replaced with Indian-made foreign liquor. Imagine killing the wine industry in France? That would be wrong.

In the automobile sector, the GST on electric cars, tractors, cycles, bikes, low-end and luxury cars ranges from 5% to 50%. Automobile sales are a barometer of an economy.

The confusion has given rise to many controversies. For example, ID Fresh Foods, which makes ready-to-eat food items like chapatis, rotis, parotas and sells a variety of idli and dosa batters, appealed against the GST decision of the Authority for Advance Rulings (Karnataka Bench). . The ruling had called for a distinction between rotis and parotta and subjected parote to a higher GST rate of 18% as food items in the category of “khakhra, plain chapati, or roti” (which fall under 5%). Didn’t come slab) and need to be processed or heated for further consumption. Can a country aspire to become a $5 trillion economy if its taxpayers turn out to be gourmet chefs and get bogged down by researching the differences between the different types of foods prepared from flour?

Then there are things that are exempt from GST. Petrol, diesel, aviation turbine fuel are not under the purview of GST but are covered under Central Excise Duty and State Taxes. Central excise duties and individual state taxes contribute more than 50% of the retail price of petrol and diesel, perhaps the highest in the world except in the Banana Republics. There is mistrust between the states and the Center over revenue sharing. There is also anger at the Center for blatantly oppressing the autonomy of the states and for violating the federal structure of the Constitution. The opposition-ruled states point fingers at Prime Minister Narendra Modi, who ironically accused the United Progressive Alliance regime of curtailing the rights of states while he was the chief minister of Gujarat.

Use the KISS principle

The low cost airline model is successful because of the KISS principle. All the frills like food, free gifts and designated seats have been done away with. Single class seating, point-to-point travel without code sharing, direct internet booking, no middlemen. Adi has maintained this model. This is a Udupi self service hotel in the sky.

The finance minister should take a cue from the prime minister, who hinted at major reforms in the aftermath of COVID-19, and did away with all the confusing tax slabs in one fell swoop. It can then introduce a truly single low tax regime with a list of exempt items. This will ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collection and reduce corruption as seen in many countries – a move that has been seen as a populist move. and will be well regarded by economists.

GR Gopinath is the founder of Air Deccan