Power groups find fault with GST

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New Delhi, Nov 6: Both India Inc and financial bureaucrats have quietly started opposing many elements of the proposed GST structure.

They fear GST’s multiple rates, complex reporting and tax payment modes may not be what they had bargained for.

They are also realising that the GST council will be forever free to change slabs, add cesses and include or exclude items from slabs at their will, putting long-term business plans in disarray.

“GST was initially conceived as a two-slab tax regime capped at 12 per cent. It was supposed to bring down taxes, make goods and services cheaper for the consumer, give a fillip to demand and push up economic growth by around 2 per cent. The slabs were later rethought and stretched to a three-slab regime capped at 16 per cent. Now, we are staring at a 5-6 slab regime whose cap may be at 40 per cent,” a top North Block economist said.

It is feared that GST may not be able to spur the gross domestic product the way it was supposed to as the new rate structure more or less corresponds to the current total tax on a commodity. Hence, the bureaucracy feels GST may not be as successful as VAT (value-added tax) in the absence of any major economic benefit and the added burden of a complex tax structure with its paperwork.

Globally, most nations that have successfully implemented GST have adopted a single tax rate. Singapore, for example, has a GST rate of 7 per cent, while Australia’s is set at 10 per cent.

VAT had revolutionised state revenues in the early 2000s, giving them double-digit growth and pulling most of them out of the red. However, without any fillip to consumer demand, GST may not be able to replicate that.

India Inc, which had supported the government’s every move till now, too, is disturbed.

CII director-general Chandrajit Banerjee has issued a statement: “The GST should begin with an absolute limit of four rates as suggested by the government, and over time, the government should commit to converging these four rates to one or two rates.”

Though India Inc is not making any strong statements, apex chambers may be expected to start lobbying the government to roll back the number of rates even as the GST Council deliberates how to apportion assessment rights between the states and the Centre.

The setting of GST rates around the same levels as current total taxes, including excise and VAT, has confounded India Inc, who expected a lower cost curve with the lowering of taxes.

“The standard rates of 12 and 18 percent for most of the items and services keep the overall tax incidence just below or around the existing tax costs,” points out Rajeev Dimri, leader, indirect tax, BMR & Associates LLP.

While the “28 per cent tax slab on items currently facing 30-31 percent tax (including excise and VAT) would need to be watched out for, this might increase the tax burden on certain items”, Dimri cautions.

Industry is even more concerned about the GST council’s power to change slabs, add cesses and include or exclude items from slabs at will.

This is being seen as a new Licence Raj, where businesses will have to lobby with the council to move their product from a higher to a lower slab or to prevent it from adding cess or even new slabs.

Business houses fear this could be used as a tool to extract favours from them during elections.

Service tax is also a major worry. Besides lack of clarity on the rate at which services will be taxed, it’s felt that states could get into the act of assessing service tax. This would mean that even large banks may have to kow-tow to state revenue departments explaining why they have paid service tax to another state simply because their headquarters are in that state.

“The complexities of service tax on financial services is something which is very difficult to understand … state bureaucracies are just not equipped to handle it,” said Amit Bannerjee, a merchant banker handling East Asian funds.

Experts are puzzled that world over the introduction of GST along with reforms in direct taxes have made economies low tax ones. “That is totally missing here,” said Banerjee.

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