A messy GST, and the road ahead: 

A messy GST, and the road ahead: 

Context:

The government has clarified this week that food takeaways from air-conditioned restaurants will be taxed at 18% even when the customer is handed over the food in an area that does not have air-conditioning.

Introduction:

•  Some of the decisions taken by the GST Council earlier this month highlight the problem in a stark manner.
• Admission to planetariums will now attract a lower tax.
•   The margins payable to fair shop dealers will be tax-free.
•  The burden of GST in the case of plumbers or carpenters selling their services online will now be borne by e-commerce companies.
• Rental cab services will have the option of paying a higher GST rate with input tax credit or a lower rate without input tax credit.
•  Job work services in respect of the textiles and textile products will attract a lower GST rate.
• The problem is even deeper once the main economic argument for GST is understood.
• It is supposed to be a national value-added tax that targets final consumption rather than the production of intermediate goods.
•  This design satisfies the rules by modern theories of optimal taxation, for example in the work of economists such as Peter Diamond and James Mirrlees, who both went on to win Nobel Prizes.

GST regime:

• The GST in its current form has five rates.
• It is very likely this has led to case of inverted taxation.
•   The tax on inputs is higher than the tax on output.
•  This principle of a destination-based tax is blown away when there are embedded input taxes.
•  The imperfect GST that India now has is still superior to the inefficient indirect tax system that it has replaced.

What to be done now?

• The complexity of the GST structure right now, as well as its novelty, will mean that companies will take time to figure out their tax liabilities.
• The government would do well to give taxpayers the benefit of doubt in the first few months.
• There should be regulatory forbearance to avoid the prospects of overenthusiastic tax officials assuming that every mistake is a crime.
• The Union finance minister must reassure tax officials that missing tax collection targets will not be held against them.
• The cesses have been imposed temporarily to compensate states for potential revenue losses. They should be the first to go once tax collections pick up.
•  The next step should be to move as many goods and services as possible
•  It is essential that more people accept that the current structure is seriously flawed, the result of messy political bargaining.