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Towards a single low tax regime

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June 23, 2022

Why in news?

In December 2018, the late Finance Minister, Arun Jaitley, announced that the 28% GST slab, which he called the “dying slab”, would be phased out, except for luxury items, and India would eventually have just two slabs: 5% and a standard rate between 12% and 18%.

Why is the tax regime complex and confusing?

  • The introduction of a uniform GST was a watershed moment in India since the country’s earlier regime of taxes and cesses, both at the Centre and the States, was a big barrier to free trade and economic growth and was a cesspool of corruption.
  • However, GST is still a complicated tax regime with different slabs.
  • It is not easy to comprehend or comply with and is open to interpretation, harassment, and avoidable litigation.
  • Bureaucracy, the world over, is usually oblivious to the keep it simple, stupid (KISS) principle.
  • Asking bureaucrats to identify and categorize all products and services for differential tax slabs in the GST regime is the surest way to get into a muddle.
  • An unambiguous directive to the bureaucracy is necessary from the ruling dispensation to come up with just two categories: goods eligible for zero tax and goods that will fall under a single rate, say 10% or 12%.
  • That means everything except those specifically exempt, is taxed.
  • ‘Sin’ taxes, for instance, are at cross purposes with the government’s policy of generating growth and creating jobs under ‘Make in India’.

A case study approach

  • A typical 300-room five-star hotel generates direct employment for around 500 people of whom 90% are waiters, housekeeping staff, front desk staff, security and concierge staff, besides cooks, financial and clerical staff.
  • There are a host of others employed in associated services such as the spa, gift shops, and swimming pool.
  • The hotel also generates indirect employment in ancillary areas: it buys bed linen, furnishings, rugs and carpets, air conditioners, cutlery, electrical fittings, and furniture, and consumes enormous quantities of food produce.
  • All these generate jobs and income for farmers, construction contractors, artisans, and other manufacturers.
  • Five-star hotels also generate foreign exchange by attracting rich tourists and visitors.
  • So, it’s unwise to tax these hotels to death.
  • Household necessities: Similarly, high taxes on air-conditioners, air-conditioned restaurants, chocolates, and luxury cars create an economic ripple effect downstream, in a complex web of businesses that have symbiotic relationships.
  • The effect finally reaches down to the bottom of the employment pyramid.
  • Food: The GST on bread is zero, but the vegetable sandwich is in the 5% tax slab, hitting the vegetable grower directly.
  • The GST on buns is zero, but buns with a few raisins fall in the 5% slab.
  • Automobiles sector: the GST on electric cars, tractors, cycles, bikes, low-end and luxury cars ranges anywhere from 5% to 50%.
  • The sale of automobiles is the barometer of an economy.

What are the items that are exempt from the GST?

  • Petrol, diesel, and aviation turbine fuel are not under the purview of GST but come under Central excise and State taxes.
  • Central excise duties and varying State taxes contribute over 50% of the retail price of petrol and diesel, probably the highest in the world barring banana republics.
  • There is distrust between the States and the Centre on revenue sharing.

What are the ways to overcome the complexity?

  • The plan must be to figure out how to rev up the economy.
  • It can be done by making the rich and upper-middle-class spend and moving more people up the value chain.
  • This can be done in order that more chocolates and ACs and automobiles are bought by them, instead of designing a tax system that keeps these products out of the new consumer class’s reach.

What is the way forward?

  • KISS model: The low-cost airline model is successful because of the KISS principle.
  • Single class seating, point-to-point travel with no code sharing, direct Internet booking, and no middlemen. etc. have sustained this model.
  • The Finance Minister should take a cue from the Prime Minister, who hinted at major reforms in the aftermath of COVID-19 and do away with all the confusing tax slabs in one fell swoop.
  • That will ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collections and reduce corruption as witnessed in many countries – a move that will be both populist and well-regarded by economists.



  1. https://www.thehindu.com/todays-paper/tp-opinion/towards-a-single-low-tax-regime/article65555922.ece
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