India Economics:GST~Government Finalizes Rate Structure

Our view – Multiple rate structure a compromise with respect to the objectiveof GST: The objective of the implementation of GST is to reduce the inefficienciesin the current tax system, such as multiplicity of tax rates, elimination ofcascading impact, and ease of compliance. The report of the CEA-led panel onsetting the Revenue Neutral Report (released in Dec-15) recommended amodified two-rate structure, comprised of a low rate and a standard rate alongwith a demerit rate vs. a more desireable single-tax rate structure. Thus, today'sdecision to implement a four-tier tax structure is a further compromise comparedto the initial objective of the GST. Moreover, looking at other countries'experience suggests that most have adopted a single tax rate when implementingGST – the most recent example is Malaysia, which implemented the GST in 2015,with a single tax rate of 6%. Indeed, the CEA-led panel report highlighted: "Ideally, the GST should aspire to a single rate, which would then also be thestandard rate. Since 2000, about 90% of countries that have adopted a VAT havechosen to have a single rate. The tax administration benefits of having a single rateare substantial." As regards the impact on inflation, given that we do not havedetails, the exact inflationary impact is unclear. If the incidence of the actual taxrate is close to the revenue-neutral rate, the inflationary impact should beminimal.