GST is not panacea

The propensity to hype anything that politicians, big businessmen, and thought leaders deem important is growing by the day. Brexit, we were told, would spell doom for the world. If Reserve Bank of India Governor Raghuram Rajan did not get a second term, we were told again, the Indian economy would collapse. Thankfully, we missed the date with apocalypse in both cases. This, however, has not deterred the popes and bishops of public discourse from indulging in exaggeration. The only difference is that their current fetish is upbeat rather than apocalyptic. They have declared the constitutional amendment for the rollout of a goods and services tax regime as the panacea for the nation. As a consequence of this ‘big-bang’ reform, we were promised instant nirvana, another edition of achhe din.

However, immediately after the Narendra Modi government’s victory in the Rajya Sabha, even as the celebrations were on, the perils of the road not taken so far have become evident. To begin with, the tax rate is likely to prove contentious. The day after the Rajya Sabha nod, Finance Minister Arun Jaitley said, “On almost 60-70 per cent of commodities on a weighted average you are paying 27 per cent plus a large number of small taxes. Some of the states have 30-32 per cent tax rate. The guiding principle laid by the Empowered Committee [of state finance ministers] is this rate has to come down.”

A committee chaired by Chief Economic Advisor Arvind Subramanian last year had recommended a 16.9-18.9 per cent ‘standard’ rate for the bulk of goods and services, 12 per cent for ‘low rate goods,’ and 40 per cent for ‘demerit’ goods such as luxury car, aerated beverages, pan masala, and tobacco. For precious metals, a range of 2-6 per cent was recommended. According to Subramanian’s estimates, a GST rate in the region of 22 per cent will boost inflationary tendencies.

Revenue Secretary Hasmukh Adhia Adhia believes that the expectation of the GST standard rate to be 18 per cent is “premature,” as it would entail significant revenue losses.

Then there is the issue of ratification. While Adhia said the Union government would like half of the states ratify the Bill within the next 30 days, The Indian Express reported (August 6) that the Narendra Modi government has already asked states to ratify the constitutional amendment Bill this month. Typically, the Prime Minister and his party are gearing up to make the Bill’s passage in the Lok Sabha on Monday a ‘glorious moment.’

The government, along with others, is pinning its hopes on GST in the belief that it would increase the gross domestic product by up to 2 per cent. It would be beneficial for business and industry by way of making compliance easier. “A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all taxpayer services such as registrations, returns, payments, etc., would be available to the taxpayers online, which would make compliance easy and transparent,” says an official website. Further, GST would ensure all-India uniformity of tax rates and structures remove cascading, improve competitiveness, and boost manufacturing and exports.

For Central and state governments too, GST would be simple and easy to administer, doing away with multiple indirect taxes. Besides, the Finance Ministry believes that, GST would lead to better controls on leakage and higher revenue efficiency.

And, to boot, all these benefits would not be at the expense of the consumer. In fact, the government is confident that the consumer would gain because of a single and transparent tax proportionate to the value of goods and services. This will lead to relief in the overall tax burden. In short, GST would be a win-win-win proposition.

All these claims may true but the government would be well-advised to consider two facts. First, a tax regime is as good as the men and women administering it are. The quality and the integrity of taxmen, however, leave a lot to be desired. The previous Congress-led dispensation, which was recklessly populist, needed a lot of resources and therefore it had stooped to downright extortionist policies; the Vodafone row was a testimony to the UPA government’s depravity. The government fell but the taxmen’s penchant for tax terrorism did not bow out. As it is, Jaitley has not completely done away with retrospective taxation—a key demand of corporate India. On top of that, taxmen tend to behave like independent entities, unwilling to listen to even the Revenue Secretary, who is said to be a most important bureaucrat. Unless taxmen are reined in, which Adhia is trying to do with full support from the Prime Minister, no tax regime would function properly.

Secondly, there is the danger of investing too much optimism on a new tax regime. Years ago, we were told that value-added tax or VAT would do away with incongruities and corruption in the system, but this is nowhere to be seen. In fact, two years ago, former member-secretary of the Empowered Committee of State Finance Ministers for the Reform of Sales Tax Mahesh C. Purohit wrote (Business Standard, May 14, 2014), “Although corruption is prevalent in all the arms of administration in India, its existence in the administration of VAT is mind-boggling.”

One hopes that a few years down the line, no tax expert delivers a similar verdict on GST.