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Why did the Indian government fix 28% as the maximum GST rate?

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Why did the Indian government fix 28% as the maximum GST rate?
posted Dec 13, 2017 by Shantanu Arora

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GST has subsumed a bunch of taxes. That is these taxes which were levied on different types of transactions based on different rules and at different rates have been abolished and replaced with GST which is a pure movement/consumption based tax. In most of the cases, what the council has currently done, is added the existing tax rates and fit it into the 5 rate slabs.

For example, if a product was previously charged 14% VAT & 12.5% Excise Duties, it is now replaced with a 28% GST (14% + 12.5% = 26.5%, the additional 1.5% for other levies like Octroi/LBT/Entry tax etc)

During the early discussions, the revenue neutral rate i.e the rate at which the government revenue would remain neutral was 18%. However, that is only when a FLAT 18% is charged across all goods & services. For example in Germany, Bread is charged at 19% VAT/GST and so is Beer. In the Indian context, considering the huge income inequality, such a flat rate would be disastrous. Imagine a poor laborer paying 18% tax on slippers while a wealthy business man paying the same 18% on fancy cars or suits.

Keeping this income inequality & principles of progressive taxation in mind, the council decided to keep 5 tax slabs - 0%, 5%, 12%, 18% & 28%. The classification of most of the products (barring some exceptions where the council wanted to be pro-poor or anti-sins like Tobacco, cold drinks etc.) into these categories was fitted based on the existing tax incidence as I mentioned above in the first para.

Also, the rates were decided not assuming the increase in compliance (due to stronger enforcement mechanisms) by businesses resulting in an increase in tax collection for the Governments. Meaning that the council could have kept a lower highest tax slab than 28% assuming that instead of 10 people who paid tax previously, now 13 would pay. However, no one would want to take that risk. Imagine, if for any reason, instead of 10 now only 9 pay and 1 more person/business is able to evade taxes due to some loopholes in the law or the government machinery. It would be crazy time for the governments as it is easy to decrease taxes but get ready for an anti-incumbency vote next polls if you try to increase it.

With time if compliance increases, and the results clearly show that more number of people are depositing taxes, we could easily see a reduction in the higher slab from 28% to below 25% levels.

answer Dec 14, 2017 by Pratiksha Shetty
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