No perspicuous
picture
G. Srinivasan
President Pranab Mukherjee rolling out the Goods and Services Tax
(GST) in Parliament's Central Hall as Prime Minister Narendra Modi
looks on. The Modi Government is
in the comfortable lap
of victory as it has been
consistently getting its
priorities through thick
and thin. This is
glaringly so on the economic front
with the launch of the Goods and
Services Tax (GST) from July 1,
2017 which was a great feat, given
the protracted parleys and withal
the difficulty of dealing with
complex nitty-gritty of the new tax.
As it is still early days to get a
fair assessment of how the rollout
of this indirect tax reform that was
set off at the stroke of the
midnight on June 30 in the Central
Hall of Parliament in a glittering
ceremony, initial impact is mixed
post-GST days as nobody is sure of
how the trajectory is going to
shape up.
There were a lot of gaffes too.
First, fertilizer was taxed at 12
percent and only after a strident
stir by peasantry and political
parties across the spectrum that it
has been reduced to 5 per cent.
Anomalies abound within a sector
too as tractors and other farm
appliances attract 12 per cent GST,
even as tractor tyres and tubes,
engines and other parts are being
taxed at 28 per cent.
Textile industry of organized traders and unorganized sellers
together too was on a warpath as it
sought out nil tax on fabrics which
the authorities refused as this will
break the input tax credit chains.
Even in PM Modi's Gujarat, Surat,
the hub of India's synthetic sari
trade, there was a persistent
protest for over a month as it
reopened businesses on July 18
with protests persisting.
Despite the initial hiccups, the
nation which suffered long an
indirect tax system that was mindboggling
to wade and difficult to
comply with, the GST was a boon
to say the least. Presumably so, as
the GST replaces the extant
labyrinthine system where the Centre levies a central excise duty
on goods up to the production
stage and a service tax on services
while the States impose a State
value-added tax (VAT) on sales of
goods, but do not have the
latitude to tax services.
Interestingly, each of these taxes
has a VAT structure, but they are
applied on different bases.
Besides, there are a spate of
additional taxes such as the
additional duty, special excise duty
and various central cesses by the
Centre and luxury tax,
entertainment tax, octroi by the
States. Henceforth, all these taxes
by the Centre would be subsumed
into a single central GST and the multiple state taxes by the state
into a State GST. There is also an
Integrated GST involving both the
Centre and the State GST. All the
taxes would be applied on a
common base and at the same
rate for each commodity across
the nation. This is a great
simplification that needs to be
appreciated.
It is not for nothing that policy
wonks and overseas investors
praise GST as its benefits to the
economy are too immense. A
seamless market of over a billion
people and eight million registered
indirect tax assesses disbursing a
single tax for goods and services
would surely help in scoring what
the government has been
attempting to do through various
tacks—promoting the manufacturing sector, enhancing
exports, fostering more jobs,
improving the investment milieu,
focusing on tax evasion and
constantly making do to lower the
compliance cost to businesses.
Overall, for businesses, a
seeming end to multiple levies and
creation of a single unified market
with fewer tax rats and fewer tax
exemptions would vastly improve
the ease of doing business and cut
avoidable litigation. Delays
triggered off by the long line of
trucks at State borders were quite
a wonted sight in the pre-GST period. It is reckoned that the
country lost as much as 21.3
billion dollars annually due to
transportation delays and
additional fuel consumption, as
per a recent report coauthored by
Transport Corporation of India and
IIM, Kolkata.
It needs to be kept in view that
the GST as evolved by the Centre
and the States is not an ideal tax
reform because it excludes half of
the gross domestic product. Major
items such as petroleum, natural
gas, alcohol, electricity and real
estate/construction are left out.
While petroleum could be covered
within five years, residential
apartments have been included
but all other construction,
including commercial construction
and factories is not.
Besides, a very large number of
commodities have been exempted.
Again, though from the concept of
an ideal GST of low tax rate with
few exemptions were initially
bruited, the final form has multiple
slabs: 3 per cent on gold, 5 per
cent, 12 per cent, 18 per cent and
28 per cent plus an extra GST cess
on some luxury or socially
undesirable items that are
euphemistically described as sin
tax.
Critics contend that such
multiple rates are an open call to
misclassification and altercation/
harassment stemming from
suspicion of misclassification. This
is bound to dilute the efficiency
gains which were predicted to
generate higher growth.
The former Deputy Chairman,
Planning Commission and a
distinguished economist, Mr.
Montek Singh Ahluwalia, said that
if revenues are lower because of
the exclusions and the large
numbers of items are at a very low
rate, the revenue loss would be
entirely borne by the Centre. This
is because it would not only have
less revenue under the central GST
but it is also committed to
compensate the states if their revenue grows at less than 14 per
cent per annum in nominal terms.
Montek Singh AhluwaliaWhat is more to compound the
cup of woes for the Centre is that
all this will have to be
accommodated within the Centre's
fiscal deficit trajectory. The hardearned
gains accruing from fiscal consolidation down the years may
be the casualty till the GST regime
stabilizes and generates healthy
returns for the stakeholders, both
the Centre and the States. This is
what one wistfully hopes.
Experts are of the strong view
that the next logical step now that
the GST is firmly in place is to
improve the design of GST by
bringing in the sectors left out.
Even as crude petroleum and
petroleum products are part of
GST, five items—crude oil, petrol,
diesel, aviation turbine fuel and
natural gas have been kept out
temporarily.
The law enjoins that the items
can be brought under the GST at
any time with the approval of the
GST Council and as this has also
the backing of the Ministry of
Petroleum because the revenue
loss for the petroleum sector is
significant due to the sector
getting sundered into GST and
non-GST segments.
Some argue that even if this is
not immediately feasible natural
gas could be deemed for inclusion
because this is an industrial
intermediate and GST input credits
can be passed on to the final
products which are within the GST.
According to V.S.Krishnan, the
measures to enhance the taxable
base of GST by bringing electricity,
petroleum and land and real
estates would improve revenue
buoyancy and also enable the
government to reduce the number
of rates.
V.S. Krishnan
Interestingly, the GST has
evolved new rules to prevent entities from making unjust
enrichment or reap excessive
profits due to the GST. As the GST,
along with the input tax credit, is
ultimately expected to bring down
prices, a National Anti Profiteering
Authority (NAA) is to be set up
before long to ensure that the
benefits that accrue to entities due
to cut in cost is passed on to the
consumers.
Also, entities that hike rates
inordinately, citing GST as the
reason, would be checked by this
new authority. When the antiprofiteering
rules were released
recently, the trade and industry
could not discern anything other
than the fact that if post
investigation it is determined that
profiteering had taken place, there
are penalties which could be
slapped and the GST registration
could be cancelled.
The rules merely stated the
authority may determine the
methodology and procedure for
determination—whether the
reduction in the rate of tax on
supply of goods or services or the
benefit of input tax credit has been
passed on by way of
commensurate cut in prices. Since, the proviso that "commensurate
reduction in the price" is not
defined or discussed in the Act or
draft rules, there is a genuine
ground for fear that the authorities
might act in an arbitrary fashion to
exact rent which is normally the
fallout of such regulations.
Shashi Tharoor
Congress MP Shashi Tharoor maintains that the GST retains
enough "complexity that it is likely
to lead to evasion, arbitrage and
even bribery of tax officials". He
further noted that much like
Modi's 'disastrous demonetization
gamble just eight months ago---
which entailed the abrupt
withdrawal of all largedenomination
banknotes from
circulation—his GST has proved
both messy and disruptive".
The backbone for GST is the
information technology network
christened the GSTN (GST
Network). Besides businesses with
a turnover of less than Rs 20 lakh
that are exempt from GST, all
other suppliers of goods and
services are required to register
with the GSTN.
The main question is whether
small and medium businesses, a
majority of which remain
unacquainted with IT would be
able to cruise to an entirely IT,
driven module. Preliminary
calculations put GSTN would be
required to handle a minimum of
three billion invoices per month.
There is some respite as the
ability of GSTN to handle this
humongous load and the ability of
the businesses especially small
and medium ones to shift to a
tech-driven regime being the
imponderables, the real test will
come in September when the first
lot of returns for July 2017
transactions are filed.
Many level-headed experts
argue that the Government would
have tested the GSTN more
thoroughly before implementing
it. Small and medium- sized
businesses, multi-state enterprises
and consumers ought to have been
accorded the breather to
familiarize themselves with the
task of filing three returns each
month.
In all, as the GST regime kicks in
as a desirable compact of
cooperative federalism between
the Centre and the States/Union
Territories, the proof of its ease
and simplicity would be unraveled
as the days roll by and how the
consumers stand to benefit by a
reduced tax on their consumption
items.