One of the arguments that finance minister Arun Jaitley has put forward after the passing of the 122nd Constitution Amendment Bill ushering in the Goods and Services Tax (GST) with regard to the GST rate is that the governments — central and states — need tax revenues to spend on developmental and welfare schemes, and therefore they cannot have a lower GST rate.Jaitley was of the view that the rate should be “optimum and fair”. What he was objecting to was the Congress’s demand as argued by former finance minister P Chidambaram that the rate should not be more than 18%.Jaitley and his aides in the finance ministry feel that the government cannot afford revenue losses, even as it would not be acceptable to the state finance ministers.The argument is that even at 20% or a little more, the GST rate would be far less than the existing cumulative rate of around 32%, which is what is being shelled out by the taxpayer as of now.There is perhaps room to quibble over what should be the ideal GST rate, though the government’s expert committee headed by the chief economic advisor Arvind Subramaniam favoured a rate between 15% and 18%. The government could very well argue that the 18% should serve as the target towards which the GST rate should move, but it will be an unrealistic figure to start with.The interesting point, however, is the change in the stance of Jaitley in the last two years. In the General Budget debate in 2014, he had argued that he believed in low taxes, wider tax base and better tax compliance which would result in higher tax collections. It was a classic free market tax philosophy tenet.But his arguments for a higher tax rate under the new system seem to be based on two things. First, there is the fear and anxiety of revenue loss because of the contingencies involved in the implementation of GST, where the central government is to compensate the states’ loss of revenue initially due to GST.
What is more surprising, however, is Jaitley’s argument that the tax revenue should be higher because the central and state governments need them to spend on developmental programmes and welfare schemes make him a retrogressive socialist-era finance minister.
He has nothing but contempt for anything to do with socialism with its distasteful — for free market believers — philosophy of tax and spend.
It is then a strange turnaround in a matter of two years as finance minister that Jaitley should be talking in favour of the tax-and-spend doctrine.