Has the Modi Government Made a Mistake by Introducing GST on All Food Items?

The Role of the GST Council

Mohanty, a well-educated individual, has raised a pertinent question about the recent addition of GST on all food items. It is crucial to understand the decentralized nature of the Goods and Services Tax (GST) system in India. The implementation of GST is managed by a GST Council, which comprises one representative from the central government and all state governments and union territories with legislative councils. Decisions are made through unanimous or majority voting, with all states having a say in the process.

Common People’s Benefit

The recent move to impose GST on food items was not a unilateral decision by the Modi government. The GST Council, through its unanimous decision, agreed that this measure would be beneficial to the common people. The intention behind this move was to eliminate issues such as adulteration and other market irregularities. Adulteration is a prevalent issue in India, and addressing it through taxation could potentially lead to safer and more reliable food products.

Revenue Neutral Rate (RNR)

When considering the reduction of tax rates and the exemption of goods and services from taxation, one cannot ignore the historical context of the Revenue Neutral Rate (RNR). In 2017, the RNR for India was estimated to be around 11 to 12 percent. This rate implies that if the government were to maintain the same tax revenue, it would have to apply this uniform rate to all goods and services. However, this approach would face significant challenges due to the public’s habit of seeking tax exemptions and populist taxation practices.

The Populism Approach

The Indian government has historically introduced a six-rate GST structure, which left many essential items, including food, exempt from taxation. This populist approach led to high tax rates on luxury goods such as motor cars. The continuation of this populist policy would likely result in continued multiple rates and high tax rates, generating tax fraud, litigations, and other issues.

Simplistic and Consistent Taxation

The ideal solution would be to tax all products at a uniform rate, with some essential food items, services, grains, and pulses remaining exempt. This approach, while not rocket science, would require a significant shift in mindset. As it stands, the public's desire for tax exemptions and concessions is vocal, making the process of implementing a uniform rate more challenging.

The Critique

Some critics argue that the government's move towards levying taxes on all goods and services, including essential food items, is more about political strategy and raising funds for political campaigns than genuine policy reform. While it is true that politicians often use taxation as a tool to secure public support, the reality is that tax reforms are necessary to address market irregularities and improve overall economic efficiency.

Conclusion

Whether the Modi government has made a blunder or a necessary adjustment in the tax policy landscape, the decision to impose GST on food items reflects a broader debate about the role of taxation in India. While the move may face criticism, it also represents a step towards ensuring better market practices and public welfare.