GST Rate Hikes and Chaos of Clarifications

The curdling of sentiments was triggered by debatable timing of the hikes. The GST is five years old. But the debates on applicability, ideal number of rates, compensation for states is yet to be settled and tinkering continues unabated.

By Shankar Aiyar | Published: 24th July 2022 12:00 AM |

You could say the situation scripted the idiom.?

This week the new GST rates on products ranging from cereals to curds to clothes came into effect. The Kolaveri, aka outpouring of outrage, inducted culinary processes for an inspired expression of protest.

Milk must be curdled to produce cottage cheese also known as paneer. A meme viral on social media asked if GST paid on milk was refundable if milk was curdled and speculated whether GST was applicable on the paneer produced from GST-paid curdled milk. Another meme presented a maths puzzle which asked: If GST on paneer is 5 per cent, GST on butter is 12 per cent, and GST on masala is 5 per cent, what would/should/could be the GST on paneer butter masala? The march of memes, blended with popular imagery from the movies, riveted the attention of the masses.

Context is critical for policy. The curdling of the sentiments was catalysed by the debatable timing of the rate hike. The wholesale price index has been hovering around 15 per cent for three months and has been in double digits for over 12 months. Retail inflation or consumer price index has been way above the target rate of 4 per cent for over a year and above the tolerance level of 6 per cent for six months.

Public perception and reaction rest on narratives. It is true that rising government expenditure — on subsidies and welfare measures such as the PM Garib Kalyan Anna Yojana for 800 million persons — requires raising revenues. Equally, there is the influential assertion of the government of record revenues being collected — GST collections have topped Rs 1.4 lakh crore for four months in a row, and net direct tax collections were higher at Rs 3.39 lakh crore.

Arguably there is a gap between what is available and what is needed. But there is as yet no word on it from the GST Council — or indeed the committee which ostensibly would have estimated the revenue potential of the new taxes. For now, public opinion is sceptical or at best conflicted in the absence of a persuasive storyline.

There is also a question about the impact. Would the hike in rates of household goods aggravate inflationary pressures? The jury is yet out — some estimates place it at a tolerable level of around 30 basis points. More pertinently, would it yield revenue or dampen demand given the slowdown in rural offtake FMCG companies are crying hoarse about.

Compounding the confusion is poor communication. This was manifested in the perception of a GST of 18 per cent on crematorium services whereas in reality the tax is applicable on contract and building works for the facilities. The fact that Finance Minister Nirmala Sitharaman had to step in with a series of 14 tweets to clear the picture illustrates the state of drafting and explanatory communication.

There is also chaos about applicability and definitions. Does the tax of ‘prepacked’ discriminate between wholesale and retail? Would the tax impact the promise of expanding e-commerce to neighbourhood shops through ONDC? Take sectors such as food processing and green energy — does the regime encourage investments??

Must there be a distinction between taxing plain Sandesh and chocolate Sandesh or tax on ice cream served in a restaurant and an ice cream parlour? The journey of 47 GST Council Meetings has thrown up a parade of changes, and the landscape is riddled with a plethora of clarifications.

Every episode of rate change triggers confusion in its wake. Predictably the parties in the Opposition capitalised on the angst, protesting in Parliament and in public. But the parties who are in power in a dozen states must state upfront what their stance was in the decision-making process. The decision was made by the GST Council, and prima facie opposition parties are party to the decision.

The Congress, which is the principal opposition party, is in power in two states. Did the Congress and the regional parties now protesting disagree with the decision to hike — particularly since the revenue would be shared with states? Was there a dissent note? If there isn’t a provision for one, did they make their stand clear between June 29, when the decision was announced, and July 18, the date of implementation?

Beyond partisan politics, there is a fundamental challenge. The Goods and Services Tax regime has been in place since mid-2017. A tax regime covering every square mile of India can scarcely afford perplexing changes and perennial uncertainty. The debates over the landscape of applicability, the neutral rate, and the ideal number of rates are yet to be settled and tinkering continues unabated. The question of compensation to states persists and hogs political rhetoric and attention.

India’s economy is continually evolving in scale and complexity. An economy approaching the $ 5 trillion GDP mark needs a defined glidepath to stability and predictability for all stakeholders. That is the essence of the grand bargain and the promise of the idea.

Shankkar Aiyar , political economy analyst, is author of ‘Accidental India ’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution ’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions ’. You can email him at [email protected] and follow him on Twitter @ShankkarAiyar . His previous columns can be found here . This column was first published here .