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From now until Diwali, people could hold back on expenditure on goods on which the Goods and Services Tax (GST) is proposed to be slashed. Was it smart to announce the rate cut in advance?
The saving grace is that people have such low trust in the government that they might still go ahead and buy the things they were planning to buy, because they might expect what they hope to buy to be made even more expensive than they are now, by being taxed at a rate of 40 per cent, reserved for luxury goods, rather than at the present rate of 28 per cent.
Defining luxury
Luxury is a nebulous concept. The populist strain running rampant in Indian politics might deem anything not afforded by the median voter to be a luxury. That would result in many goods and services currently deemed common suddenly turning luxe, and being taxed at 40 per cent. Would a car with an engine capacity above 1,500 cc qualify as luxury or as a utility, albeit a sporty one?
“Can chocolate be counted as a necessity? Our people are struggling to eat two square meals!” We can imagine such snatches of conversation when finance ministers meet at the GST Council, even as their governments go broke trying to pay for the extravagant handouts promised at the time of elections.
Instead of arbitrarily deciding anything as a luxury good, it is perhaps best to give it a narrow and precise definition. An item of consumption whose demand goes up when its price goes up is a luxury good, being consumed not so much for its utility when used as for the exclusivity it bestows on its consumer.
An item of consumption whose demand goes up when its price goes up is a luxury good, being consumed not so much for its utility when used as for the exclusivity it bestows on its consumer.
If you increase the price of chocolates or hotel tariffs, demand for them would fall. These do not qualify as luxury goods. A Rolex, a Patek Philippe or a Birkin bag from Hermes, on the other hand, signals exclusivity, and the higher the price, the higher its appeal.
Taxing luxury goods
When you tax a luxury good, everyone would cheer. Those who are urged to work 70 hours a day would think it absolutely the right move. So would those who urged them to, as they scratch their chin, flashing their Omega on the wrist, as they rue the big fuss over a sentiment expressed purely to avoid marital stress among their employees, who spend long weekends solely in the company of their spouses, when they could go to the office and work.
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Applying this criterion to identify a luxury good would avoid confusing premium goods with luxury goods. High quality would command a premium price, and, at the same rate of tax applicable to the standard good, yield higher tax revenue. There is no need to bracket premium goods with luxury goods.
We are long past the stage when air travel fell in the category of luxury. It is a utility. Business class commands a premium, because it gives additional services, apart from enabling swift travel. But first class? That is a marker of exclusivity, and fits the definition of luxury. Private jets also should be classified as luxury, the charges they pay at airports should attract luxury rates.
What about cess?
Luxury should attract levies cumulating to 40 per cent, but not as GST. Let it comprise 18 per cent GST and 22 per cent cess.
The cess proceeds should mandatorily go into the shareable pool for the states, but should not be eligible for input tax credit under GST. If a company wants to pamper its owners and top executives with private jet travel, let it bear an additional cost, as compared to another company that avoids such frills, and reflect the cost as a higher price for its product or service, suffering a competitive disadvantage vis-à-vis the frugal rival.
Classifying the entirety of the tax premium on the luxury goods as GST only results in revenue loss for the government.
India arbitrarily charges different import duties on aircraft, depending on whether they are intended for captive personal use or for charter services. To avail themselves of the lower import duty, every company with a private jet sets up a charter service, and imports the jet for the charter service company.
Classifying the entirety of the tax premium on the luxury goods as GST only results in revenue loss for the government.
The charter company then charges its corporate clients, and patronised politicians, a charter fee. It is only reasonable to levy a luxury cess on that charter service fee, in addition to the standard GST of 18 per cent on airfares.
Sin goods fall into a separate bucket. The entirety of their punitive tax rate should be in the form of GST, since the sin element kicks in only at the time of end consumption. Here, the constraint is on extortionate rates leading to revenue leakage, as a result of consumers directing their demand to illegal goods, whether smuggled cigarettes, or online gaming on foreign, often subterranean sites that evade taxation altogether.
Online gaming
A revamp of the tax is the right occasion to correct some anomalies in the present tax structure. For instance, online gaming is taxed in a wholly irrational fashion. These are taxed on the deposits players make.
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The deposits actually comprise two elements, the platform fee charged by the gaming company for hosting the game, and the stake the players put up to match their skills against those of rival players.
Taxing deposit amounts to taxing the stake, which is irrational, while the platform fee is the legitimate target of GST.
The platform fee constitutes the gaming company’s revenue, called gross gaming revenue, and that should attract the highest GST rate applicable to a risky indulgence. But taxing the stake element is like taxing the value of a stock trade, instead of taxing just the brokerage.
The stake goes on to form the winning of the victorious gamer, which is subjected to income tax at a special, 30% rate. The net effect of the current obtuse GST on online gaming is to burden online gaming companies with a GST on the fee for their service that is way above the legal limit for a tax on service, and erodes their profitability.
Online gaming is a bigger global industry in its totality than movies, and India has just a tiny share of the global market. The aim should be to nurture this industry that can deploy a wide swathe of talent, in areas ranging from graphics and coding to storytelling and music, and not to smother it in its infancy with taxes.
Some day, the government will learn to tax goods rationally, and, after a decent interval during which this sea-change in government behaviour gradually sinks in, people will learn to trust the government.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)
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