GST tweaking may worsen cash crunch

In this season of giving, Prime Minister Modi has taken the lead in bringing down the Goods and Services Tax (GST) on the favourite items of the upper and the aspirational middle classes. It was disappointing, however, that he was not able to reduce the number of tax slabs from the present four to, say, just two. Understandably it cannot be one as, he said, milk and Mercedes cannot be taxed at the same rate. Fair enough. But in the interest of simplicity, Mr Modi could have rationalised the GST as it has been in existence for over a year and has already seen about 200 tweaks according to one report. Even the World Bank has commented that India has one of the most complex tax systems in the world where 115 countries have a unified tax system and 49 countries have just one slab. It also has the second highest rate of tax. Saturday saw the fifth round and still there seems to be much more that needs to be tweaked or rationalised. For instance, how does paan masala and personal aircraft and yachts come in the same bracket of 28 per cent. Since when is paan masala a luxury or sin item? Tobacco one can understand, since it can cause cancer, but paan masala is second nature to a large number of Indians as chewing gum is to Americans. It would be interesting if the bureaucrats or whoever designs the GST and does the tweaking could explain why some taxes are reduced and others are not.

Mr Modi obviously has his eye on the 2019 elections that are barely four months way as he seeks to woo the middle class. This is specially important considering the drubbing that the party got at the recent polls, specially in a major state like Madhya Pradesh.

The government is expected to forego '50,000 crore annually because of these cuts and it has yet to disclose how it expects to fill this gaping hole. Its finances are in a precarious condition and this was reflected in its unsuccessful attempt to dip into the huge reserves of the Reserve Bank of India. That it has denied this is immaterial. Union finance minister Arun Jaitley is confident that with this reduction there would be more tax compliance. So far this has not happened. Earlier Mr Jaitey had said demonetisation had helped to bring more people into the tax net. But results showed that the increase could have been achieved without demonetisation that wrecked colossal damage on the economy. Time will show if this present tweaking is merited. The Central government has to compensate the states for the full year so one does not know where these funds will come from. Perhaps the government feels it will be the headache for the next government.