With India getting ready for launch of Goods and Services Tax [GST] – the most revolutionary reform ever undertaken since independence – in just over a month from now i.e. July 1, 2017, while expectations run high with the political class, corporate and investors [including foreign investors] seeing big gains, it is time to introspect whether this will deliver on the intended outcomes.
The GST architecture that has finally emerged – after a series of brainstorming sessions by all powerful GST Council – is hamstrung by a number of inhibiting features which could impede realizing the full potential of this reform in terms of boost to GDP [gross domestic product], buoyancy in tax revenue, lower inflation and increase in competitiveness of Indian industry and service sector.
First, in their obsession to protect existing revenue, states have managed to keep key oil & gas products [crude, gas, petrol and diesel], potable alcohol [except industrial alcohol] and real estate [sans work contracts] out of GST ambit. These three categories are money spinners and account for 1/3rd of their total revenue. Even though, oil & gas have been included but these are ‘zero rated’ for now. That is as bad as not including them under GST.
GST Council intends to take a call on when to remove the ‘zero rated’ caveat. But, that seems unlikely in the near term as a decision can be taken with 3/4th majority of members and since, states put together have 2/3rd voting share in the council, they won’t let this happen given their vested interest in retaining this cash cow.
Hence, oil & gas companies will continue to pay excise duty and VAT [value added tax] – plus other local levies under existing dispensation – but won’t get credit for duty paid on purchase of their inputs including equipment, machinery etc as under GST, their output [read crude, gas, petrol and diesel] are zero rated. As a result, user industries and consumers will continue to bear the brunt of existing levies and their cascading effect.
The role of these products in the economy is akin to blood running through all the veins and arteries of human body. Unless they are included in GST, the probability of economy getting hemorrhaged will remain high. As regards, alcohol and real estate, the center and states have not even spelt out their intent to consider their inclusion.
Second, the obsession not to loose even a single rupee vis-à-vis what they are getting under existing dispensation has driven the states to demand full compensation for the loss if any, for full 5 years which center has agreed to grant. Indeed, this has been incorporated in the constitution amendment act. But, this comes with a price tag by diminishing robustness of GST architecture.
Because, union government is under an obligation [albeit statutory] to fully compensate the states, it has made the council agree to impose cess on demerit goods in addition to applicable 28% under the 4 slab tax structure for generating the required resources. This will make the regime inflationary which is the anti-thesis of what it promises.
One may argue the cess being on de-merit goods [aerated drinks, luxury cars, cigarettes etc] it should be no cause for worry. On the face of it, one might agree as it does not affect the common man. Nonetheless, this will affect competitiveness of concerned industries especially exports. True, local taxes are not to be exported and there is provision under GST for their refund. But, refund comes with a time lag.
Third, the Council has fixed rates on individual items in a manner such that the applicable rate under GST regime is very close to effective incidence under existing dispensation. In several cases, the incidence is even higher depending on the category in which a particular item is included. This defeats the very rationale for bringing in GST which is intended to reduce the tax incidence.
Fourth, the proposed structure is highly heterogeneous and differentiated. In the commodities segment, there are minimum of 5 rates viz. nil, 5%, 12%, 18% and 28%. In services also, contrary to initial expectations of a maximum of 3 slabs, these have also been fitted in mentioned 5 slabs i.e. same as for goods sector. Together with cesses, the number of rate categories will increase manifold.
This will make the new regime look no less convoluted than the existing system. With so many rate classifications, it will also be vulnerable to lobbying [already, this has started with several industry associations making representations] and give discretionary powers to bureaucrats in deciding which item will fall under which class. This could be a fertile ground for corruption and nepotism in the system.
Fifth, relevant legislation also have a provision for increasing maximum rate to 40% [as against 28% at present]. While, this is stated to be an enabling provision to deal with emergency situations, the real intent is to garner more resources unmindful of its consequences in terms of the cost push. Imagine a scenario of 40% plus cess on say, a demerit good; this could be much worse than levies under existing dispensation [even with cascading effect of tax on tax].
Sixth, even under the GST regime, the possibility of municipal corporations and other local bodies continuing with local levies like octroi, entry tax, entertainment tax etc is not ruled out. Though out of sync with the underlying philosophy of GST, under extant constitutional provisions, the local authorities enjoy powers to impose such taxes. If, they are hell bent on levying these taxes, the mere existence of CGST/IGST/SGST cannot prevent them.
To sum up, the emerging GST architecture has all bad elements of existing regime. It is nowhere near an ideal destination based ‘unified’ and ‘simple’ tax that is needed to make GDP grow faster, boost tax revenue and enhance competitiveness of Indian economy. The sole reason for this is states’ zeal to protect their turf/revenue and lack of faith in what GST can deliver. They need to shed this mind-set; the rest will follow automatically.