'You don't raise taxes to get out of demand slowdown' — Pronob Sen and Haseeb Drabu on govt move to raise GST rates

“One should not change the rate on the basis of the level of economic activity for GST at this point of time when you are still in a transition phase. You have still not completed the whole regime change. If you start changing rates, you are changing the virtue of architecture of the GST in relation to the level of economic activity. That is not what the GST is supposed to be in any which way,” Drabu observed.

The bulk of the GST collection are in intermediates goods. According to Sen, in the case of intermediates, the Centre has advantages in collections. “There is a problem that has to be fixed at both ends and the problem is not one of the rates but it is one of administrative efficiency,” he stated.

Edited excerpts from the interview:

Sen: The rate that we are talking about, particularly the 6 percent rate, is not a very good idea at this stage. However, in any case, we were expecting over time a reduction in the bandwidth of the GST rates and this would be a part of it. So in itself it does not disturb me very much.

However, the 6 percent is applied to what are considered to be necessities. They are the items of common consumption, which are hurting in any case today. So an increase in the GST rate at this point may be a little disruptive. Under more normal circumstances, I would not have bothered about it at all.

Sen: As far as the consumer price index (CPI) is concerned, we need to get into the mode of factoring out tax effect. It is not a good idea to have tax effects as a part of the CPI because these are one-offs, they are not trendsetters. So one should simply adjust for that. I would not worry too much about the CPI at the moment.

I am much more worried about the fact that PFCE is down; now if you raise the middle rate, I would have worried less. However, what you are doing is raising the lower rates, which means that precisely those segments of the society which are having a hard time buying their necessities even today, are going to be hit even harder.

Sen: Yes, do not raise the 5 percent rate to 8 percent.

Drabu: I will go along with Sen in terms of the impact. However, what I want to highlight is, one should not change the rate on the basis of the level of economic activity for GST at this point of time when you are still in a transition phase, you have still not completed the whole regime change. If you start changing rates, you are changing the virtue of architecture of the GST in relation to the level of economic activity. That is not what the GST is supposed to be in any which way.

In fact, are we now looking at changing rate bands? I thought the best way to do it if at all would be to collapse that band and take it to three levels, what was the original idea where you go to 14-14.5 and basically reclassify commodities rather than make rate changes. As it is, there has been 1,200 changes that have happened in the past three or four months. So, it is now becoming a real issue when the original advantage of having how it was done is being diluted and this is becoming a problem.

For the first time I heard somewhere last week in Delhi that people are now saying that kill GST. So, this is now getting into another zone which was not expected. I would think that the way it was designed was that you would have reclassified commodities in these bands.

Drabu: The point is, why are you linking the 14 percent to the rate changes? 14 percent was supposed to be financed through a cess, which is the compensation cess.

Drabu: What I am saying is that when you go back to origins of it and how it ought to function, rate change should not be done to finance compensation. The whole idea really at that point of time was that you should do it out of cess. So, in principle this is wrong.

Drabu: Yes, I would imagine but I think this is not just restricted to GST Council. What you see adding to the whole thing is the Finance Commission award as and when it starts coming in. So, you will have a period when you will have skirmishes between the Centre and the state. I think we need to go back to the original principle. The real problem is that the GST Council has not functioned as it had in the beginning when the entire architecture was laid out, I think that is the key concern.

Sen: If you actually think of the way GST works, the bulk of the GST collection are really in intermediates, they are not in final consumption. We do get fair amount from final consumption but particularly at the higher end. However, for the rest the bulk comes from the intermediate goods and services.

Now given that what this is saying in effect is that possibly two things are happening; number one – those which are directly business to consumer (B2C) sales, we may be in a situation where parallel channels of distribution are being set up where GST is simply being ejected. That is a problem that has to be fixed administratively, it is not a rate change issue. In a sense, I am not very aware of whether or not the state governments which were responsible for collecting sales tax – whether they have diluted their sales tax force because they are the only ones who can operate at the B2C level. The central government does not have the wherewithal to do it.

As far as intermediate goods are concerned that is almost entirely in the domain of the Centre. That is where the Centre has advantages in collections. There is a problem that has to be fixed at both ends and the problem is not one of the rates but it is one of administrative efficiency.

Sen: You don’t get out of a consumption or a demand side slowdown by raising taxes, that is about the worst economics that I can think off. Even a third-year BA student will tell you that it sounds wrong.

Drabu: There was a huge administrative structure which had been created where sharing of the implementation responsibilities were divided between Centre and states. However please remember that it is a self-assessment system. So, you have to give it time for it to develop. Now you need to look at what ways are being used to avoid it but this whole issue which Pronab Sen is raising about the sales tax force, the whole idea was to move away from that kind of a thing to a regulated and risk-based assessment thing. So, it was meant to be self-assessed and a move away from this whole police-type actions by the sales tax departments of the states. However, I also feel that it is a wrong way to say that states are not making efforts because 14 percent is guaranteed. States on their own do actually make efforts to raise their own taxes, nobody wants to kind of get things from the Centre as freebies. So, that is a wrong impression that gets created all the time.