Methods of Taxation:

The Goods and Service Tax (GST) system is a very efficient, effective and equitable system for the first and second category of Goods and Services. The more one buys or consumes such items, the more one pays as tax. The rates of such taxation can be used to direct consumption in the appropriate direction in case of addictive and health affecting items which result in a greater burden on society. The tendency to use the tax policy to affect other ‘flavour of the day’ demands (to modifying eating habits or to enforce environmental conditions etc.) should be strongly resisted as it may otherwise soon lead to cascading demands for other causes supported by the ever increasing number of self-interested groups or NGOs. Every adult has the right to make his / her own choice, the government should at best only ensure that he /she is properly informed.

It is well recognized that such a Consumption/ Expenditure Tax (G.S.T.) is the best and most equitable way of taxation without affecting the interest rates and thus entrepreneurship and industry. The very nature of such a tax, allowing offset of the input tax paid, is inherently a way to plug collection gaps and encourage compliance. It also, has the advantage of reducing the tax collection burden on the Government by effectively outsourcing collection to Businesses with little reward to them for effective collection, but with inherent stiff penalties for failure as they will then not be able to claim the input credit for taxes already paid. Allowing for an additional cess, on such G.S.T., to be applied from time to time, both at the Central and State level if at all found necessary, will enable a more effective and better way to control Country-wide, or only State-wide, inflation or also, at times of State or National distress or disaster. To prevent misuse by the Tax Authorities such cess should be only for a quarter and automatically lapse thereafter unless reapplied vide a transparent methodology. (See “Wealth, Market Economics & Entrepreneurship – The Case for”)

In order to reduce the burden of GST on the low-income category, the tax rate on the staple foods, sold un-packaged, and other essential items of consumption (both Goods and Services) should be at a minimal rate (say one percent). Other non-staple and also, other value-added food items purchased from factories as packaged goods may be treated differently from the basic staple food items, though still taxed at a low rate (five or six percent) as these are already subject to tax under MRP, and hence eligible for set-off. All other essential goods and services should also, be taxed at five or six percent.

All other Goods and services may be taxed at 12 percent. The category, consisting of the enablers that greatly increase the productivity of the above-mentioned categories and also, generate greater employment, needs to be looked at, and priced and taxed differently especially as the increased productivity and employment are themselves again taxed to generate greater tax income. Hence, the aim should be to encourage consumption of such enablers and therefore to arrive at pricing based on costs, where it can be costed, and on value as determined by competitive methodology keeping in mind
the benefit to the public where costs are difficult or impossible to arrive at. In this category fall goods such as Fuel / Coal / Energy, Water, Frequency Spectrum for I.T., Voice and Data communication etc., and Services such as Education and Skill development, Medical services and Health insurance (which allows for less down time) and R & D, all of which are enablers enhancing greater and more efficient productivity and generating greater employment and thus delivering better value and benefits to the Public and hence, should be taxed, if at all, at a minimal rate, at one or at most five or six percent or at
a fixed amount per unit.

The litmus test to determine whether a product or service is an enabler or not, is to first determine whether its consumption results, directly or indirectly, in a short or longer term, in greater productivity of other Goods and/or enhancement of employment, which are then in turn taxable under the Goods and Services Tax. If so, it should be considered an enabler, even of a tiny fraction of its consumption could be as an end product. (e.g.: The tiny amount of the water we consume domestically compared to the total quantity of water we use, or the tiny fraction of the fuel used for personal transportation for purely reasons of pleasure as compared to the total fuel consumed). Since an enabler generates greater taxable Goods and Services, taxing the enablers at a lower rate, if at all, will still result in overall tax gain. After all, the product or result of the use of such enablers will again be subject to G.S.T.

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