During its 55th meeting, the GST Council clarified that tax treatment for popcorn would depend on its flavour and the way it was sold; while popcorn sold loose will be taxed at 5 per cent, GST on popcorn will incre a se to 12 per cent if it was sold in packets under a brand name, while caramelised popcorn would be taxed at 18 per cent. There is another twist; popcorn purchased with a movie ticket, will be taxed at the same rate as the movie ticket.

This is not a needless complication dreamt up by an underworked bureaucrat; we have on the Finance Minister’s authority that this was a well debated change made by the GST Council. Similarly, in another anomaly, while both cream and bun attract GST at 5 per cent, a cream bun is taxed at 18 per cent. With five rates and some articles like jewellery being taxed at special rates, GST has an exceedingly complicated structure. Most countries in the world have one rate for GST, some have two, but only four-five countries have five GST slabs. Then we have VAT on petroleum products and alcohol.

Advertisement

This has made indirect taxation needlessly complicated, leading to multiple frauds that we read about every day. A patent anomaly is that currently collection of GST, which is regressive in nature, affecting the poor and rich equally, is almost equal to that of the progressive direct taxes. In fact, GST collections are galloping so fast that the Government has discontinued publishing monthly collection figures for GST. Moreover, an overhaul of GST structure with a view to lessen incidence of GST on the poor is desperately needed; according to the latest Oxfam report “Survival of the Richest: The India Story,” a little less than two-thirds (64.3 per cent) of the total GST is paid by the bottom 50 per cent of the population, one-third of the GST is collected from the middle 40 per cent, and only 3-4 per cent from the richest 10 per cent of the country.

We definitely need an effort to make GST the Good and Simple Tax that it was intended to be. The holistic Indian direct tax system, developed under the guidance of Hungarian-British economist Nicholas Kaldor, who advised no less than eight countries on tax policy, fares no better. The Wealth-tax Act, Gift-tax Act and Estate Duty have been repealed, while the Income-tax Act has been amended annually, making it really complex and iniquitous. Over the years, despite roaring inflation, minimum income liable to tax has remained almost the same, putting a great burden on the bottom tier of tax payers. We have two taxation systems, the old regime and new regime, which unnecessarily confuse small tax payers, who cannot file their return without professional help ~ imposing a considerable compliance cost on them. So far as businesses are concerned, manufacturing companies pay tax @ 15 per cent, most other companies @ 25 per cent, but firms, who run small businesses, are taxed at a flat 30 per cent.

The Government has further complicated the taxation structure by a system of surcharges ~ individuals having an income exceeding Rs.5 crore pay surcharge @37 per cent, translating into a tax rate of 42.74 per cent, while companies with the same income pay a surcharge of 7 per cent, leading to an effective tax rate of 27.82 percent. This anomaly is reflected in tax collections ~ personal income-tax collection has consistently exceeded corporate tax collection in recent times. It would appear that the Government believes in a top down approach ~ money in the hands of large corporates, in the form of tax cuts and subsidies like Production Linked Incentive (PLI), would fuel GDP and job growth. However, the downside of this approach is now becoming visible; manufacturing led growth has not happened ~ the share of manufacturing in national GDP has remained almost static, and with most factories being fully automated, jobs are shifting away from the manufacturing sector. Another distinctive initiative is spending on infrastructure, which has outpaced spending on other sectors; resultantly, we now have some world-class airports, roads and railway stations. But this has come at a huge cost.

Central Government expenditure, in real terms as share of GDP, has shrunk since 2017 (barring the two Covid years), with proposed expenditure (again in real terms) for the current financial year being less than the Revised Estimates for FY 2023-24. Given that the tax ratio is estimated to increase, the proposed budget is actually contractionary in real terms. Then, expenditure on infrastructure building has crowded out expenditure on vital sectors like healthcare, education and even defence, resulting in Agniveers and sub-standard government hospitals and schools. Since almost all infrastructure projects are debt-funded, Government borrowings have ballooned, making debt servicing the biggest component of the Budget. Also, most of the material for the Government’s grandiose infrastructure projects are sourced from China; many of the contractors are foreign, read Chinese, so, downstream benefits do not flow to local firms.

Mundane things like regular maintenance of infrastructure are put on the back-burner, leading to falling bridges and crashing trains. Moreover, every project or scheme is denominated in lakhs of crores of rupees, with the rider that ‘it is over 5 years,’ leading to lax monitoring. In this scenario, one may very well ask: What was wrong with the late lamented five-year plans, which prescribed targets and kept an eye on achievements? The vexed question about the budget deficit and Government borrowings has been left unanswered. According to the Fiscal Responsibility and Budget Management (FRBM) Act 2003, fiscal deficit was to go down to 3 per cent of GDP by 31 March 2008, and reduce annually by 0.3 per cent thereafter, yet the fiscal deficit on 31 March 2024 was 5.8 per cent of GDP, budgeted to come down to 4.9 per cent in FY 2024-25 ~ still far in excess of what was originally envisaged by the FRBM Act.

Also, according to FRBM, Central Government Debt, should not exceed 40 per cent of GDP by 2024-25, but according to Budget Estimates, Central Government Debt is slated to touch 82.4 per cent of GDP by 31 March 2025. The ills of uncontrolled State borrowing are many; it is a debt we incur, but which is repaid by future generations. Thus, there are many good reasons for reducing Government expenditure. Unfortunately, all such reasons pale into insignificance in the face of compulsive populism. The FRBM Review Committee Report made a host of recommendations for ensuring fiscal prudence, including the setting up of an autonomous Fiscal Committee to manage fiscal strategy. None of the Committee’s recommendations have been implemented.

Also, the Fifteenth Finance Commission had recommended a review of Central Schemes, with axing of unviable ones. However, Revised Estimates for Financial Year 2023-24, show an expenditure of Rs.19.06 lakh crore on Central Schemes, which is budgeted to grow to Rs.20.21 lakh crore in Financial Year 2024-25, with no review of Central Schemes in sight. Obviously, an efficient tax system along with a brake on profligacy can help the Government balance its books. Reform of the tax structure, which squeezes small people and small businesses, as also adjusting the minimum income liable to tax for inflation, would help the middle class and simultaneously boost consumption, since poor and middle-income people tend to spend the extra income earned by them. Contrarily, the rich, who are already spending at a substantial level, rarely spend the extra income earned by them. Rationalisation of GST, with a view to lower its incidence on the poor, would also help in this exercise. A basic reform could be to align the taxation system to economic growth. Currently, high GST rates are fuelling inflation and a skewed direct tax system is inhibiting growth, by not leaving enough money in the hands of entrepreneurs. Revenue departments are assigned targets for collection ~ which goes against the grain of collecting taxes fairly.

Collection targets are then passed to tax officials who strain to achieve them by fair means or foul which reaches a crescendo in the month of March. At this juncture, Finance Ministry officials appear on the scene as impartial referees ~ fully disowning their earlier roles. Finally, what happens to the assiduously garnered taxes? “It is a popular delusion that the government wastes vast amounts of money through inefficiency and sloth. Enormous effort and elaborate planning are required to waste this much money” (P.J. O’Rourke, political satirist).

(The writer is a retired Principal Chief Commissioner of Income-Tax)