Ushering in GST: A lot is yet to be explained

The Goods and Services Tax Bill has been poised in the Rajya Sabha between the government’s determination to see it through and the Congress’ resolve to block it unless the amendments that it has suggested are accepted and incorporated in the legislation. The party in power and the main Opposition have a minor difference that may block the constitutional amendment but are both agreed on the need for the change, which will have far-reaching consequences. After meeting the state finance ministers the Centre agreed to ensure any shortfall in receipts by states will be compensated by the Centre for five years.

There is little need to deny the increase in speed in the transport of goods across the country the proposed law will lead to as trucks will no longer have to wait at octroi nakas or state borders. The main push for the bill comes from the business community, for it would enable it to operate in a “one India market”, and not many, that the present system supposedly ensures.

Government spokesmen say the bill would have revolutionary consequences — “the nation is on the cusp of executing one of the most ambitious and remarkable tax reforms in its independent history” which is perhaps “unprecedented in modern global tax history”. Its proponents maintain somewhat incredibly that if would boost GDP by one per cent or more, and would generate resources for health and education. Unlike the present tax structure which “by fragmenting Indian markets on state lines” also undermines the PM’s “Make in India policy by favouring imports and disfavouring domestic production”.

Tall, unsubstantiated words, which may be swallowed by the gullible, but a close examination of facts would show expenditure on and delivery of health and education has fallen drastically in the past two years, GDP growth may be greatly inflated. “Make in India” made little headway, except in defence production.

While the new tax proposals have some benefits, they can lead to serious problems in implementation and concentrate power further in the Central government.

India is a federal country with financial powers divided between the Centre, states and local bodies such as municipal corporations. The only other comparable country is the United States, which is among the few countries that has not experimented with a goods and services tax. The goods and services tax is a comprehensive and more extensive value added tax and has had mixed results in countries like Britain, Australia, Singapore and Canada, where it has been tried.

In Australia, a 10 per cent GST introduced in 2001 led to negative growth in the first year for the first time in over a decade. In Britain, the VAT introduced in 1973 was attacked by critics as regressive as the poorest people spent a higher proportion of disposable income on VAT than the richest.

Singapore now has a GCT of seven per cent and critics “consider GST to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich”.

In India, the situation is more complicated as it is a federal state with the power to tax divided between the Centre and states. Already, a turf war has broken out between central and state the indirect tax departments over their assessment and adjudication powers. The states want that they should get sole administrative powers to carry out assessment, scrutiny and passing of orders for entities and traders up to an annual turnover of '1.5 crore, and beyond that both states and the Centre should have these powers; while the Centre says if states get exclusive control over entities up to '1.5 crore, the Centre should get exclusive control over all those above that. Since GST has two parts, Central GST and state GST, such differences are inevitable.

Further, it still hasn’t been clarified how much of GST will be taken by the Centre and by each state. By collecting more tax than it is entitled to, the Centre would have power over disbursal of funds to states. Besides, there are large cities like Mumbai and New Delhi, each of which have annual budgets of around '30,000 crores each. Would they be willing to give the power to the Central or state government to collect the money and then disburse it to them This would mean a weakening of democracy and the concentration power in the Centre. Arvind Subramaniam, chief economic adviser to the government, wrote in a recent article: “We must also be realistic about the timeframe for assessing GST. The GST is fiendishly, mind-bogglingly complex to administer.”

While many states have verbally given their assent to the bill, serious differences will arise in its implementation, specially if there is an “unfriendly” government at the Centre. In the present system, the rate of sales tax imposed on a particular commodity falls within the boundaries of each state, is decided by the state government concerned and these tax rates vary across states. Making the same rate mandatory across states would therefore amount to eroding the autonomy of states in exercising their already limited tax powers.

What VAT and its extension, GST, do is to increase indirect taxation while reducing direct taxes. India already has one of the lowest tax rates of 33 per cent for the richest in the land. To this must be added concessions or subsidies of no tax on dividend income and on capital gains on shares. Apart from this, there is the '6 lakh crores given as a writeoff to the corporate sector. What GST will do is increase indirect taxes that hit the poor as they are aimed at raising prices of spending on consumption. Together with a reduction in social sector spending on health, education and clean drinking water, this is part of the Narendra Modi government’s rightward shift in priorities. We can expect as much from the new GST Bill that is due to come up in Parliament next week.

The writer is a Mumbai-based freelance journalist