Finally, the contours of the Goods and Services Tax (GST) regime has become clear with the two-day session of the GST Council at Srinagar coming to an end on 19 May (Friday). The GST Council has largely worked out the details of the fixation of the items to the four-fold tax-structure (0 percent, 5 percent, 12 percent, 18 percent and 28 percent) that has been agreed upon.
We have now effectively a five-fold tax structure if we take into consideration the fact that the so-called ‘sin’ goods or ‘demerit’ goods are still outside the purview of the GST.
As such, if we take into account only the four rates that have been agreed upon by the GST Council, how does it compare with the other nations of the world, rich or poor, who have implemented a GST regime?
Well, with 28 percent as the highest taxation slab in our scheme of things, we acquire the dubious distinction of the most taxed country as far as the indirect taxes are concerned.
Let us do a brief comparison. Let us first focus on some outliers.
Let us then take, for example a country like Australia where the 10 percent tax rate applies to all goods and services eligible for tax. Indonesia too has a standard 10 percent tax rate, with a stipulation that some goods would attract 15 percent tax and others 5 percent tax. South Korea again has a standard rate of 10 percent.
Japan is, of course, a rich country and it has a standard consumption tax of 8 percent. But the Japanese government has announced that the GST rate would increase to 10 percent effective from October 1, 2019 (this is unlike our country where the rulers decide and increase the tax rate overnight at their whims).
Canada is one country where a two-tier GST regime has been laid out. The federal tax is fixed at 5 percent and the states have been given the option to decide on a standard rate. Two states there have chosen to levy no additional tax and four states have decided on a maximum 10 percent tax. Other states fall in between. Citizens of Canada pay between 5 percent and 15 percent of consumption tax, depending on where they live.
Let us now take a look at the European countries. Even the Scandinavian countries, best known for the social welfare oriented economies, have the highest GST rate of 25 percent, with many average consumer utilities charged at a lower rate. Sweden, for example, charges 12 percent for hotel accommodation and restaurant food (our stipulated rate is 28 percent for the higher category and 18 percent for the lower category). Sweden charges just 6 percent for cinema (we have stipulated 28 percent tax for it).
Netherlands has a highest GST rate pegged at 21 percent, but most consumer utility items such as domestic passenger transport, hotel accommodation, restaurants and entertainment activities etc are covered under the only other taxation category – that of 6 percent.
The United Kingdom has been in the news for some time for the economic distress that has led to increase in taxation across the board, but even after the increase its standard GST rate is 20 percent and the only other slab of 5 percent covers supplies of electricity, LPG etc. What is important to note that in the UK no tax is levied on household water supplies, food stuff (including processed or pre-cooked food), domestic and international passenger transport, construction of residential buildings etc (compare this with how much tax we have to pay in our country for such items).
Greece, another European country in the news for its economic meltdown, has the highest GST rate of 24 percent and reduced rate of 13 percent and 6 percent for various categories of goods and services.
Argentina, the Latin American country struggling with its economic woes for decades, is the only state which, with a 27 percent highest slab GST rate, is just a notch below our 28 percent. But that is a small consolation for us who are aspiring to be an economic superpower in the years to come.
We should compare ourselves with the country which is mostly on our radar in the sphere of economic competition, i.e. China. China has the highest GST rate of 17 percent, with seven different rates for a range of goods and services. What is significant is that it levies just 11 percent tax for entertainment (cinemas and the like) and restaurants (we have stipulated 28 percent for cinemas and five-star hotels and 18 percent for other restaurants).
What is still more noteworthy is that China has fixed 6 percent tax rate for financial services, insurances, and telecom services. And what have we done? We have fixed the rate of 18 percent for all these services – which is 300 percent higher compared to that of China.
Is there anything to save our face? There is none even when we look around us – the smaller countries in our neighbourhood. Bangladesh, for example, has the highest rate of 15 percent, with seven reduced rates for varying goods and services. The other island country in our neighbourhood, Sri Lanka, has again the standard and only GST rate of 15 percent.
Even our bedevilled neighbour, Pakistan, has the highest sales tax rate of 17 percent, with four reduced tiers of taxation. The tiny Himalayan neighbour, Nepal, has a standard and only rate of 13 percent.
Our finance ministers (union and state) may gloat over the fact that they have devised tax rates that would not increase the burden on the average taxpayer, but that would also greatly depend on whether the companies would actually pass on to the end-consumers the benefits of the input credit that they would get in the new GST regime.
But what is more important for us, the citizens, is to cogitate on this: Do we deserve to live in the most-taxed country in the democratic comity of the nations?
It would have a welcome move for us had the distinction of the highest tax rate been attained as regards the direct taxes because such taxes are progressive and citizens pay according to their income and wealth.
But the GST is an indirect tax, which is necessarily regressive — every citizen, rich or poor, pays the same rate of tax.
That is why the test for a nation that is pro-poor is: it pegs the indirect taxes as low as possible. We have clearly failed that test miserably, as we have happily created a GST regime with a taxation structure that is highest in the democratic world.