FPJ Edit: Contrary signals on taxation

It is hard to comprehend the way the economy is sought to be managed. Economic news often leaves you confused. Take for instance the reported move to drastically revise the rates for goods and services tax. It is argued that in view of the less-than-expected collections, various States are pushing for more and more items to be pushed into higher tax slabs. The GST Council, which has representatives of the States and the Centre on board, seems to have already firmed up a proposal to shift a host of items from 5 per cent slab to 12-per cent slab and from 12-per cent slab to 18-per cent slab. Though the final decision will be taken in the forthcoming meeting of the Council, it is proposed to implement the changes from the start of the next financial year. Aside from injecting an element of uncertainty with all its attendant hassles for the tax-payers, there is the question of viability of the higher levies, given that at lower rates the revenue shortfall is substantial. How realistic it is to believe that higher slabs would lead to higher collections, and not induce further tax-evasion. Instead of concentrating on widening the tax base to ensure that non-payers contribute their due share to the national kitty, higher rates of taxation could cause further distress and evasion. Given that the economy is in the grip of a slowdown, given that the consumer price inflation is already a matter of concern for the central bank, the proposed upward revision in GST rates makes little sense. Indeed, if the States realize that the lower-than-projected GST collections could well be due to the economic slowdown, they would not propose higher slabs of taxation. On the contrary, economists would argue that in case of a slowdown tax relief could well serve as an incentive for growth. It is reported that the 5 per cent slab could become an 8-per cent slab, the 12- per cent slab could be abolished in favour of a new 15-per cent slab, and a number of items could be transferred from the current 12-per cent slab to the 18-per cent slab. The inflationary impact of such an omnibus increase in levies is obvious. At the same time, it is proposed to reduce the personal income tax rates. How do you square the two moves? Contrary signals from the policy- makers are bound to confuse stake-holders. Close on the heels of a drastic downward revision in the corporate tax rates, it is now proposed to offer relief to individual tax-payers. Lowering of personal income tax rates is meant to boost growth. Rationalising direct taxes is a laudable objective. Though our personal tax rates now compare favourably with those in some of the developed countries, but to incentivise more people to join the tax net lower rates are absolutely necessary. Tax administration cannot expend all its energies in detecting tax defaulters. Lower income tax rates would leave surplus money in the hands of tax-payers which in turn could boost demand at a time when its lack is a key factor in the economic slump. Though the proposed reduction and rationalization of personal income tax rates, especially after the drastic cut in corporate tax rates is welcome, we are puzzled by the proposed move to substantially raise the GST rates which will certainly have a cost-push impact on the entire economy. It must be avoided in the midst of an economic slowdown.

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