The government is gearing up to pass Goods and Services Tax (#GST) next month. This will reduce compliance for large companies and help in movement of goods across state borders. This has the largest companies of our country excited but it won’t work in favor of small entrepreneurs. It is going to increase their compliance burden and drive them to deal in cash. It is also going to increase inflation and put pressure on the middle class and the lower class. Taxation has to be progressive. Direct tax is progressive which is why you pay more tax and at a higher rate when you make more money. Indirect tax inherently is not progressive. When you buy a packet of biscuits for Rs.10 you pay the same tax, whether you are a blue collared worker or a billionaire. This makes indirect taxes regressive because they burden everyone equally irrespective of their economic status. The only way the government is countering this is by taking the opportunity to tax luxury goods. The day is not far when microwave ovens and iPhones will also be classified as luxury goods and taxed at a higher rate. What has made it worse is the way in which GST has been framed. The theory put forth was that multiple taxes create a compliance burden and lead to a high rate of tax. A single tax to replace all would solve this. All the taxes including taxes on tobacco, alcohol and fuel were added together and averaged to arrive at a benchmark average tax. Then the GST rate was discussed. After GST had caught everyone’s imagination, the three most important sources of revenue, tobacco, alcohol and fuel were excluded from GST. However the GST benchmark rate continued to remain the same and was now artificially higher than the earlier effective rate. Additionally, while there was an assurance that no additional taxes would be introduced, there is already talk of a ‘sin cess’ which will apply to among other things even aerated water! There are four rates of GST proposed 6%, 12%, 18% and 26%! The rates for GST which were earlier to be part of the act may now be out of it, which will make it easier to raise the rates. We will soon have a peak income tax rate of 33.6% and a peak GST rate of 26%! To reiterate what I said earlier, GST is injurious to our health!