GST architecture is only getting worse

Union Finance Minister Arun Jaitley and chairman, GST (Goods and Services Tax) Council must be credited with spearheading requisite efforts like draft of all related laws — Central GST (CGST), state GST (SGST), integrated GST (IGST), legislation on compensation to states for loss of revenue, delineation/apportionment of powers for administering the tax, determination of rate structure etc in a time-bound manner to ensure that this revolutionary tax reform is kicked off from April 1, 2017.

The pace at which the GST Council was progressing, it was almost certain that the government would meet the deadline. But, the announcement by Prime Minister Narendra Modi on November 8, 2016 to demonetise Rs 1,000 and Rs 500 currency notes came as a spoke in the wheel leading to a complete washout of the winter session. As a result, the necessary bills could not be taken up for consideration, which was the original intent.

Jaitley brought it up again in the Budget session on January 31, so that GST could be launched from July 1, well before the September 2017 deadline (as per the Constitution Amendment Act, from this date, the extant dispensation of taxation like excise, VAT etc will go. Hence, GST must come in).

The potency and effectiveness of any policy reform has to be judged from its design and its implementation. This in turn, is inextricably related to the objective. It has to be a ‘single’ and ‘uniform’ nation-wide tax, applicable to all territories in the country and it has to be in sync with the philosophy of achieving a common market enabling seamless flow of goods and services.

In keeping with this philosophy, a committee set up by the 12th Finance Commission under the chairmanship of Dr Vijay Kelkar had recommended a single GST at 12% of which the Union government should levy CGST at 5% and states impose SGST at 7%. Ideally, this should have been the way to go forward; unfortunately, from the day one, our policymakers have drifted from this scenario.

A panel under Chief Economic Adviser (CEA) Dr Arvind Subramanian had proposed a three-tier structure — 12% for essential goods, 40% for so-called demerit goods (luxury cars, aerated beverages, pan masala and tobacco products) and standard rate of 17-18% on all remaining goods. The panel excluded real estate, electricity, alcohol and petroleum products while calculating rates but suggested bringing them under the ambit of GST soon.

On the other hand, in its meetings held on November 3-4, 2016, the Council decided to go for a four-tier structure — 5% for essential and daily use items, two standard rates of 12% and 18% and highest rate 28% on de-merit goods (this is in addition to an ‘exempt’ category, taking the total tiers to 5). Additionally, it decided to levy cess on the demerit goods which would vary depending on the product under consideration.

So, even if the government goes for four different rates of cess for four sub-categories under demerit head, it will become a eight-tier structure (5%, 12%, 18%, and four rates for demerit and exempt goods). And, if the government becomes overzealous in treating each demerit item differentially on the basis of its specific characteristic (for instance, different variants of luxury cars) the number of rates could increase manifold.

Lately, following representations by trade and industry associations, the Council is also veering around to consider multiple rates in services, too. For instance, the industry wants service like telecommunications, transport, banking etc to be taxed at a lower rate. A proposal doing the round is to have at least a three-tier structure for services.

With all these changes, the resulting architecture will be far removed from the desired ‘unified’ and ‘simplified’ tax regime. It will also give a lot of discretion to bureaucrats leading to corrupt practices even as business entities lobby to get favourable deals (getting their product included in a class that attracts low rate) for them. There are other loopholes in the scheme of things.

Loopholes galore

Under the Constitution, municipal authorities and other local bodies in states have been given powers to levy taxes at the local level. Although, the Constitution Amendment Act on GST provides for such levies like octroi and entry tax to be subsumed in it, local bodies won’t let these go away easily, being a major source of revenue. The absence of any legal barrier (GST notwithstanding) makes them more resolute.

The Council has not included real estate, electricity, alcohol and petroleum products under GST. Barring alcohol, all other areas touch the lifeline of economic activity and their exclusion will ensure that cascading cost push effect of extant levies (excise, VAT, local levies etc) will persist.

Besides, stakeholders in these segments will also have to live with cumbersome procedures and delays associated with their administration. In regard to administration of GST, the Council has decided that 90% of all assesses below Rs 1.5 crore (annual) threshold will be overseen by states and balance 10% by the Centre, whereas assesses above Rs 1.5 crore will be administered by the Centre and states in 50:50 ratio. The dual control inherent in this arrangement will lead to a lot of hassles and extra cost to industry and trade.

In short, it turns out that the proposed GST architecture is nowhere near an ideal consumption/destination based ‘unified’ regime and continues to be shackled by bad elements of existing dispensation. The package in the making sounds more like ‘old wine in a new bottle.’

This is due to a lurking fear among states that they will make huge losses under GST. They need to recognise the power of GST in making GDP grow faster and boosting tax collection. Once this is done, they will be fully wedded to this reform and make way for a tax structure that is truly aligned to its underlying spirit and potential.

(The writer is a New Delhi-based policy analyst)

http://www.deccanherald.com/content/596110/gst-architecture-only-getting-worse.html

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