GST, according to Kautilya     

Book V of Kautilya's Arthashastra deals with what in today's parlance is termed tax policy, complete with attendant rates of levy. What's suggested is a panoply of rates for different goods and services, but the tax share of production or bhaga is ‘usually 1/6th,' the treatise mentions. Note that while the Arthashastra does enunciate a host of special levies, surcharges and the like to mop up additional revenue, together with prescribed fees and services charges levied as a matter of routine, the tax rate stipulated for the broad range of economic activity was 16%. Now that reform of indirect taxation, read tax on production and sales, is under active policy consideration, with changeover to the goods and services tax proposed, it would make sense to make Kautilya's mode of 16% the GST rate.

The GST would be a ‘game-changing' tax reform measure, with tax set-offs available across the production value-chain, and both for goods and services. The idea is to do away with cascading rates of taxation at different stages of production — in effect regressive levy of tax on tax — so as to rationalise indirect taxes across the board, and shore up tax efficiency. And as the integrated GST is to have both a central and state component, the way ahead is to have 8% as the central GST and 8% as the state GST rate. The idea is to specifically address the issue of ‘vertical imbalances,' the apprehension that GST would worsen vertical tax revenue balance in favour of the Centre with a proportionately larger central rate.

Besides, the 8% plus 8% rate of levy would also be amenable to more realistic tax design, such as two rates. The ideal of course is to have a single rate GST — both at the Centre and the state — to avoid issues of classification etc of goods and services and to avoid tax diversion, revenue leakage and generally speaking bring about seamless input tax credit. The Thirteenth Finance Commission has given its thumps-up for GST, which it says will foster a dynamic, economy-wide common market by avoiding tax cascading, eliminate double taxation and improve resource allocation. Also, the policy purpose of GST pan-India is to ‘inhibit' tax induced migration of production activity with the express purpose of cashing in on lower tax rates.

The commission, in its report, does take the stance that two rates within the GST regime may be warranted taking into account political economy considerations, with a lower tax rate on items of everyday consumption and a higher rate for goods and services perceived as more of a luxury. The objective certainly is to minimise economic distortions in tax design. With 8% central GST, it is possible to have two rates of 4% and 8%. And likewise for the state GST —again two rates. But apart from items of common consumption, and others taxable at the standard rate, there are goods like automotive fuel and sumptuary articles like tobacco and alcohol that warrant still higher tax rates. Kautilya was indeed categorical that leisure activities including intake of liquor needs to be taxed at a higher rate, for the common good. The commission has now called for bringing in automotive fuel under a dual levy of GST, and an additional levy: with no input tax credit available on the additional levy. To the extent that it would provide limited tax-set off on fuels for activities like transportation and commercial end-use, when none is available to date, it's a move in the right direction. What's suggested is similar tax design for alcohol and tobacco items, which is unexceptionable.

Note that indirect tax reforms did begin back in 1986 at the Centre, with the concept of modified value added tax on production introduced for select items. The reform was later extended to other items of production, and service tax at the Centre was introduced subsequently in the mid 1990s. Further, the states changed over to value-added taxes on consumption, between 2003-8. The task at hand is to reach a consensus on the GST rate, operationalise its implementation and amend the Constitution so that states can levy tax on services in general. The commission's call for a tax agreement between the Centre and the states is the way forward on GST. After all, even in Kautilya's time the base tax rate could be revised in the ‘interest of the country.'

Source: Economic Times, India, dated 08/04/2010