Need of a Liberal Tax Structure to Meet Covid 19 Exigencies

A few days back fifty IRS (Indian Revenue Service) officers submitted a proposal to increase income tax from 30% to 40%, impose 4% corona cess, levy wealth tax in order to mobilise resources to meet Corona exigencies. Their suggestions created panic among the trade and industry. The proposal, if accepted, would further damage the industrial sector already crippled by lockdown/shutdown. This put the Government in embarrassment and the CBDT (Central Board of Direct Taxes) has called for explanation from three senior IRS officers who have drafted the proposal.

A taxman, whether IRS or of GST, does not think beyond tax collection. They cannot think that increase in tax rates or a new levy has what impact on trade and industry; and so this is not unexpected.

The priority of the government is first to contain and control Corona. The economic activities cannot be brought back to normalcy unless this disease is controlled. In the next phase, government’s responsibility is to revive the economy and facilitate economic activities.

GST contributes more than fifty percent of state’s total revenue collection. The government has not declared the GST collection for April; perhaps, returns have not been filed because of the lockdown. Persons in the tax administration guess April collection would be at best forty percent of its March collection. In the March, the collection was Rs. 97 thousand crore and hence, the collection of April maybe around forty thousand crores. Last year in April, the collection was Rs. 1.13 lakh crore, this year’s April collection would be around 35% of last year’s April collection. April collection is for transactions in March. Since Corona’s impact was more felt in April and April had more lockdowns covering the whole month, the collection would further plummet in May.

The GoI gives compensation to the States for the loss on account of introduction of GST. For the purpose of compensation, compensation cess is collected on tobacco products, aerated drinks, pan masala and luxury cars. The amount of Cess collected has been also meagre with the low GST collection and GoI has no sufficient funds to compensate as its revenue mobilisation has also been badly affected. The condition is likely to continue for a few more months.

The main challenge of the government is to revive the economy. If this economic inactivity continues people would die of starvation and that will be more catastrophic than the Corona disaster. Demands come for different sectors to exempt the goods or services for the industry to breathe in and get back to rails.

Exemption of any goods is not advisable from economic viewpoint. For example, newspapers demand to exempt newsprint from GST. In that case, there will be no tax on GST, but the production cost of newsprint will go up. In the event of exemptions, credit of tax paid on inputs for production of the goods is denied and that makes the goods costly. If newsprint is exempted, credit of tax paid on newsprint, machines used for production, taxes paid on services like transportation of inputs or other things shall not be available. To make newsprint cheap, not only newsprint is to be exempted, but the inputs, machinery, etc used for production of newsprint have to be exempted and any government will not go for that.

To give relief to the trade and industry, instead of exempting, the tax rates of certain goods and services and number of rates should be reduced. Presently, the GST has mainly four tax rates; 5%, 12%, 18% and 28%. The number of tax rates should be reduced from four to two and the rates should be 5% and 18%. Goods like cement, cars, air conditioners, etc and luxury hotels attract 28%. These and all other goods and services exigible to 28% should be brought down to 18%. Some in the category of 12% tax rate should be taxed at 18% and some at 5%.  The essential commodities should be in the 5% category. The tax rates of 5% and 18% can also be kept at 6% and 16% taking into account revenue consideration.

The trade and industry will benefit by reduced tax rates and less number of rates. Less number of rates will also make tax administration and compliance simple. The ideal GST should have one tax rate; most of the countries having GST have one rate. The objective when discussion began for tax reforms was to have also one rate in GST. But for economic exigencies and revenue neutrality, the GST Council decided for four rates and that continues. Now the time has come to take decision towards one GST rate.

The top administration has to stress on checking evasion and plug loophole in tax administration. At the same time, it may be kept in mind to not give more power to taxmen, so as they to not  abuse. It is seen power given more to taxmen are also grossly misused to the detriment of trade and industry. In the name of evasion and need for strong administration, inspector raj should not be brought back.

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