New Delhi: Coming under criticism for proposing four-slab multi-rate tax structure under the Goods and Service Tax (GST), Union Finance Minister Arun Jaitley on Wednesday said the objective of this is to ensure that the tax structure does not become regressive or burdensome to the common man.
At present, a tax rate of 6, 12, 18 and 26 percents has been suggested in the GST council.
Jaitley said the principal rationale behind this tax structure is that items that are presently taxed at rates closer to the range of each of the slabs will be fitted into the particular rate of the slab.
“Those presently taxed below three percent as the total tax of the Centre and the States will be taxed at a zero rate. Those between 3-9 percent will be taxed at a six percent, those between 9-15 percent will be taxed at 12 percent and there would be a standard rate of 18 percent. Some have suggested that multiple tax rate is disadvantageous to the GST and would neutralise some of the advantages of a uniform tax structure. The reality is that a multiple tax rate in India is inevitable for several reasons,” Jaitley wrote in his post.
He said different items used by different segments of society have to be taxed differently; otherwise, the GST would be regressive.
Jaitley argued that if taxation is suddenly raised on standard rate of 18 percent, it would disrupt the market and would be highly inflationary.
“Air conditioners and ‘hawai chappals’ cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The Government should not lose money necessary for expenditure nor make a windfall gain. The tax on some products in a narrow slab regime will substantially increase. This would be highly inflationary,” Jaitley said.
Jaitley said the biggest advantage of the GST lies in the GST design, which itself provides for seamless transfer of input tax credit across the value chain.
“The net gains of a more efficient tax would be felt over a longer period of time once the implementation glitches are all resolved. Hopefully with higher compliances and more revenue after the initial period, the GST Council would continue to have a look at the expenditure requirement and the tax likely to be collected and rationalise the tax rates and the structures in future,” he said.
He pointed out that some developed countries, which do not have any section of the population below the poverty levels and where economic standards are high, have three-four tax slabs.
This came after former finance minister P. Chindambaram on Monday said the GST cannot have 20 different rates, adding that it would be “disastrous” and “fooling” the country.
He opined that a well-designed GST is supposed to have a standard rate, but it cannot have different rates across the board.