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August 2017 Edition of Power Politics is updated.  Happy Diwali to all our subscribers and Distributors       August 2017 Edition of Power Politics is updated.   Happy Diwali to all our subscribers and Distributors       
Issue:August' 2017


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.