7th April 2017
After being in the pipeline for more than a decade, the GST is finally all set to be rolled out for the country. From onset it seems to be a replica of already in practice VAT with a little wider base. The VAT is already adopted by all the Indian states. When VAT came into picture, it was thought to be a replacement of the sales tax. At its soul, VAT is different from GST as VAT was imposed just on goods, GST will be implemented on both goods and services. The current system in India works on two principles. The states oversee the taxation of goods but keep off of taxing services. Centre, on the other hand, taxes manufacturing and services but refrains from taxing wholesale/retail trade. As and when the GST is rolled out it will usher in a new era where both and state will be able to expand into each other’s territory. Thus it will be a uniform way of taxing goods and services. It was due to this structure a constitutional amendment was needed to allow both the parties concurrent powers on making laws regarding the taxation of goods and services.
Hence it did not come as a surprise that the argument given by favouring parties in support of GST was not different in principle to what was given to support the inclusion of VAT nearly two decades ago. The arguments in favour are:-
First argument is that the GST, by introducing a lot First, the GST, by bringing a plethora of indirect taxes under one umbrella, will simplify tax administration, work towards improving compliance, and brush aside economic distortions that plague production, trade, and consumption.
The second argument in favour is that by generously giving credits for taxes paid on inputs at every stage in the supply it makes sure that no one steals taxes and hence reduces the production cost and makes the market more lucrative and competitive. If the Union Finance Minister ArunJaitley is to be believed, these features will add 2 per cent to the national GDP.
Now that we know about the two positives that everyone is talking about viz a viz the GST, it is imperative to check the other side of the coin. Those who are against GST have got some valid arguments too. Talking about the economic impact, some even went on to the extent of terming it draconian and a misunderstood tax that has been debated in India for years now without the most important commodity, the consumer, having any say on this issue.
As mentioned above, the government in Delhi believes that GST will have a positive impact on the GDP. Not just the current NDA regime, this was prophesized by the previous UPA government too. But there is no evidence that can back these claims. Doubters say that there is no relation between GST and GDP growth. The GST will definitely impact the way taxation is done in India and smoothen the process, there is nothing on paper that proves that it will help fuel the economic activity in a positive manner. Sighting examples of two developed countries like Australia and New Zealand, the augmenters say that the rolling out of GST did not do anything exception to boost the economic growth but it did hamper the consumption power in the lower income countries like Nigeria and Malaysia by increasing base price of commodities. This negative impact will surely dampen the economic growth. Thus it comes as a surprise that in a low income country like India there has been no real protest from the consumer groups that are to be most affected by the implementation of GST.
Structure related queries
Once the GST is implemented, it will definitely weed out the inefficiencies that currently plague the tax system in India. To understand it better, the problem of dual-layer taxation – state and central – will be solved. Indirect tax structure will be simplified. But how eliminating the duality of taxes will alter the economic growth, particularly of a state, remains under the cloud!
The Revenue Neutral Rate is expected to remain at 18 percent and that will prevent the government increasing the expenditure to propel growth. However, if GST rate is 25 percent, Indian’s tax to GDP ratio, which at 11 percent is quite low in comparison other emerging economies of Asia, will see a boost of 1-2 percentage points. If the government decides to spend the increased revenue, that is expected to be $20-40 billion, on capex, the GDP will likely see a boost under a special circumstance of the fiscal multiplies coming into picture as well. Another complication that has been giving headaches to economists is that the 1-percent inter-state tax that the government will collect and distribute among the revenue producing states is likely to reduce the advantages of a harmonised tax structure. Unlike the main GST, this 1 percent cannot be used to claim the tax relief. Yet there is no murmur about this surcharge.
Services incurring losses
If the GST continues to have a Revenue Neutral Rate (RNR) of 18 percent, most goods that currently are taxed at 24 percent will benefit hugely. However, if it is increased to 25 percent, which some factions feel might be a possibility, it will impact most goods negatively. While some believe that at this rate the amount that the government generates as revenue and the amount that it is able to spend on asset create will be boosted directly propelling the GDP growth. Even if we consider this as a positive rate, one cannot turn blind eye to the fact that the services irrespective of 18 or 25 percent RNR, will be impacted negatively because currently the service sector is taxed at 14 percent. There is another angle to look at it and even does not paint a bright picture. Service sectors contribution in the Indian GDP currently stands at 60 percent and naturally if the sticker price on this sector is increased, it will adversely impact the spending power of the consumer in India. As far as the listed stocks are concerned, some of the sectors that might be actually impacted
In the context of listed stocks, the Services sectors that will be most impacted are aviation, media, telecommunication and to some extent even Banking & Financial Services.
Despite all the effort that was invested in getting the GST implementation meet the deadline, the amount of legislative and logistical work needed to accomplish was too much to ask for.
This is all that we know as far as the economic impact is concerned but and still we do not know the complete economic impact it will have on the country. But one thing is certain it did not have a positive impact on the social-political space of the country. GST is expected to hamper the state’s fiscal and in a way political autonomy.
Loss for states
There are certain things that do not look threatening on paper. Like this fact: India will have not a single federal GST but a dual GST that will be levied and thus manged by different administrations.The Centre will take care of the central GST (CGST) and the States will administer the SGST. Even the factors such as monitoring and compliance will be taken care of independently. Some of the economists have pointed out thatwhen a country moves to a GST regime in a federal set-up, the states are bound to face certain degree of restrictions or curtailment. There will be certain rates for every commodity and the state will not be able to shift a commodity from a lower to a higher rate, or in some cases exempt it from taxing altogether.
Not only this, even the rates for the GST will be fixed by a GST council that will comprise of state finance or revenue ministers. Once the GST council sets the rate, the states will have no say over taxation rates and they won’t be able to shift the rates of the commodities on their whims and fancies. This has to be seen as eating into states control over the tax rates of the commodities that are consumed in within their boundaries. The constitution clearly states that the states have full say over the levy of taxes that account up to 80 percent. When VAT was introduced it was seen as a move aimed at curtailing this autonomy of the states but it fell flat. The primary reason for that failure was the fact there were at least 4 different VAT rates and states could very well manoeuvre around these rates. But since the GST makes it mandatory to follow uniform rate, it will erode that autonomy.
To put it simply, the loss of revenue of the states will be compensated by the centre, as written in the GST draft; but if we think about it politically, there is no provision which arms the states to fix their tax rates in case they find the rates not suitable to the economic state of affairs in their region. But there are two sides to a coin, always. Some economists believe that individual states always work for the benefit of a particular individual groups, so by taking away this privilege of fixing the tax rates, this will create an environment where lobbying to get tax exemptions and concessions will cease to exist. But if you consider this from a political argument, this does not impress. After all what it tells is that if a political representative body is incompetent, we take away the power it enjoys. This move, principally, is undemocratic.
Also what it does is that the restrictions imposed by the centre can adversely impact the states that might be more committed towards expenditure related to welfare schemes. Taking this into consideration, the GST council has a provision of not just fixing the tax rates but rates including floor bands. The band would provide some relief to states by allowing them to vary their rates depending on their requirements.
Any GST regime where every State has its own tax rate for varying goods and services doesn’t augur well for the industry, where the demand is for a single national market having a uniform tax regime. Also it the rates are different, the taxes are bound to be dual and thus they will be implemented independently by the centre and state. Instead of fretting over these, why not just focus on streamlining the existing tax structure of and not think about having a new structure altogether.
Even if we consider the most diluted version of the GST, it is expected to widen the tax base, making it identical for both the states and the centre. In the GST, the tax is paid only by the final consumer. The seller of the service submits the tax to the state that is already paid by him as far as the supply chain is concerned. To put things simply, GST like all other indirect taxes is a tax on consumption but it is expected to tighten the noose on tax fraud and discrepancies by widening the base.
Certain countries that have adopted GST have kept essential commodities out of its ambit, or in some cases kept lower rates for some selected goods. However, GST works best when there are no exemptions. New Zealand is one those countries which has followed this principal in totality. Once the GST is implemented, it moves forward by reducing the exemptions and increasing the rates as the economy progresses by widening the base.
Now that we know the pros and cons of GST, we get to the final brick in the wall: what should be the GST rate in a country like India. In 2010 when the 1th finance commission’s task force on GST recommended its rate it was 12 percent (7 percent SGST and 5 percent CGST). Four years down the line a panel comprising of state representatives suggested a revenue-neutral-rate of 27 percent (12.77 percent for CGST and 13.91 percent for SGST). Given the current scenario, both these rates seem unrealistic.
With the GST at 12 percent it will definitely mean revenue losses for the states as the general VAT rate is around 13-14 percent. On the other hand, is the GST is kept at 27 percent, it will mean a huge tax burden on the working class of the country. As far as the current economic scenario is concerned, the finance minister has made sure that it the GST rates will be finalised keeping in mind the working class and lower income groups of the country.
The best way to implement GST without having to care about incurring losses is to bring as many as goods and services under its purview as possible. This may lead to a situation where some essential services that are taxed at a lower rate get taxed at a much higher rate. This helps us understand clearly why in some of the ultra-developed countries like Canada and Australia, the lower income groups came out on street to oppose the GST. The resistance in Canada got so big that the Prime Minister had to invoke an obsolete, colonial era rule that is to draw on the special powers of the queen to get the bill passed in senate.
Given the Indian set-up where the general population is yet not aware of all the economic policy details, the government must endeavour to clear out things. After all, at the end of the day it is the average citizenry that has to shell out money to pay the taxes.
Indirect taxation shift
Whenever a government fears decline in revenue and is also wary of increasing the tax keeping in mind the tax slumber, it switches its attention to indirect taxing which hasa wider base than direct taxes. Indirect taxing is definitely more difficult to evade are more difficult to evade, far easier to implement and does not remain income dependent after a point. Only because the poor and the working class spends more on essential goods and services than the upper middle class or the upper class, this form of taxing is considered regressive as opposed to direct taxes that are levied purely on one’s basis of income. The current government has decided to lower the corporate taxes from 30 per cent to 25 per cent over a four-year period. A study conducted in 2013 by the Centre for Budget and Governance Accountability says that India’s direct tax contribute only 37.7 per cent of total tax revenue, making India’s taxation regime already more regressive in comparison to some of the other emerging markets like South Africa (57.5 per cent from direct taxes) or Indonesia (55.85 per cent). Once the GST is implemented, it is only expected to go higher. However, on a positive note to conclude this analysis, the GST might not be all that bad as the current government has bigger plans. As I write this Finance Minister, ArunJaitley, in his Union Budget has announced that the tax has been reduced to 5 percent from 10 percent for those who income falls between 2.5 lakhs t0 5 lakhs. Are not these positive signs as far as the rolling out of GST is concerned?
2017 © Monetic Corp Consultants Private Limited - U74999DL2013PTC261819
Download GST E-book, An introductory guide for Goods and Service Tax by Registrationwala.
Like every GST liable business, you'll also need a GST software. Registrationwala has come up with a return preparing and filing software GST Tool.
To schedule a online demo, submit your details.