A ‘simple’ tax that became ‘complex’

[dropcap]N[/dropcap]o one can disagree with PM Modi when he says Mercedes and milk cannot be taxed at the same rate. And yet, he is not telling the full story.

What he introduced to the nation as a “good and simple tax”, but derisively called the “Gabbar Singh tax” by Rahul Gandhi, when it was introduced this time last year has not proved to be simple. A recent World Bank report had described India’s GST as more complex than similar taxes in other countries. It attributed the complexity to the “higher tax rates and large number of tax slabs” compared with the systems in many other countries.

GST in India has multiple tax rates of 0, 5, 12, 18, and 28 per cent, respectively. But most countries have a single rate. India’s highest slab of 28 per cent is the second-highest among 115 sampled countries and the highest in Asia. The report said that 49 countries used a single rate, 28 two rates, and only five, including India, four rates. The others in India’s company are Italy, Luxembourg, Pakistan and Ghana.

Modi’s ‘Mercedes, milk’ analogy was in response to the stand of the Congress, which has favoured a single rate, probably inspired by the World Bank observation. But the PM denied that it was too complex and asserted that GST had helped consolidate Indian cooperative federalism and was designed to eliminate ‘inspector raj’.

There had been teething troubles, he conceded, but it was bound to happen when such a large economic system as India’s was completely reset.

While Modi is right that Mercedes and milk cannot be taxed at the same rate, he did not address the issue of how tax evasion by those who drive around in Mercedes and buy milk from the humble corner store is being treated differently. Those who buy milk have no option but to pay their tax along with the price of the milk, while there are large numbers of Mercedes-owners who dodge paying their taxes.

In fact, Modi’s finance minister, himself, pointed out recently how Indians still had not developed a culture of paying taxes voluntarily and this forced others to pay higher prices for whatever they consumed. His assertion came while defending the high retail prices of diesel and petrol. “The tragedy of the honest taxpayer is that he not only pays his own share of taxes, but also has to compensate for the evader,” Arun Jaitley had said, explaining why the government kept increasing taxes on petroleum products even when prices in the international markets were falling.

The offshoot of such policy, however, is that the evaders keep on evading, while the rest of the people keep paying through their nose because the tax they pay is built into the price of whatever they buy.