Just imagine: my neighbour has been renovating his house for the past few months. He has broken down the edifice, perhaps he thinks it is outdated now, and is using modern architecture incorporating landscape designing. I am sure the renovated house will surely look ultra modern, with strong geometric shapes and swanky looking interiors, and would certainly be far more functional.
But what if my neighbour were to later send me a fat bill to share his construction costs? This is not done, anyone will say. After all, why should I be made to pay for the renovation work my neighbor decides to undertake.
This is exactly what we are being made to overlook in the entire discussions happening around the ‘path-breaking’, ‘historical’ and ‘game changer’ Goods and Services Tax (GST). I have heard the Finance Minister Arun Jaitley say time and again how GST will be game changer for India Inc. The GST, which certainly is a tax reform, will replace all the existing indirect taxes like central excise duty, sales tax, value added tax, luxury tax, service tax, octroi and so on. It is expected that GST will greatly reduce the cascading effect, as a result of which growth is likely to increase by 0.9 to 1.7 per cent of GDP.
I had always failed to understand why a cumbersome tax regime was in operation all these decades. Not only would a plethora of taxes, or as some say tax over tax, add not only to the cost of a product but the system merrily allowed rampant corruption at every stage of tax collection. Whatever be the reasons, the reality is that consumers paid the final retail price even if it was on the higher side. The producer had to live with the hassles of a laborious multi-tax regime whereas the end cost – in the form of a higher price — was always borne by the consumer.
The GST will now provide a hassle-free tax regime for the goods producer. Instead of multiple taxes on goods and services, and at multiple entry points, there will only be a single tax to be now paid. Whether it finally increase the growth rate is beside the point, but what is more important is that it will create an environment conducive to making it easy for business.
While it makes it easy for business I fail to understand why the consumer is being made to bear the ultimate cost. Like I shared the story of my neighbour’s house under renovation, the GST is also essentially a renovation of the prevailing multi-layered tax regime. I am sure you will agree that the cost of renovation should be paid by those who are undertaking the tax reform. If India Inc is the real beneficiary, as we all know, they should be asked to pay for it. Instead, the cost is being very conveniently passed on to gullible consumers.
To prepare the consumers to absorb the high GST rate, Arun Jaitley had raised the service tax in Budget 2015 from 12.36 to 14 per cent. We will get to know only at the time of the next Budget in 2016 as to how much money has been extracted from common man’s pocket in 2015-16. Just to give you an idea, service tax alone had yielded an additional Rs 50,000-crore in the previous fiscal. If I go by the progressive increase in service tax collections, and knowing that service tax will merge with single rate GST which is expected to have a standard rate of 18 per cent, the additional annual fiscal burden on the ignorant masses will be somewhere around Rs 2.5 lakh crores.
In other words, the entire cost of undertaking GST reforms is to be borne by the consumers. The sole beneficiary – India Inc – gets away without paying anything.
Since the GST is a single rate, service tax has to be merged with it. This makes economic sense. But this is perhaps also essential to ensure that the existing revenue collections – measured in the form of Revenue Neutral Rate (RNR) – do not fall. The drop in revenue from the existing multi-layered taxation system is therefore certain. To make up for the shortfall, the best way is to further tax the common man. A careful perusal of the Report on the Revenue Neutral Rate and Structure of Rate for Goods and Services Tax (GST)submitted by a team headed by the Chief Economic Advisor Arvind Subramaniam clearly brings out the deliberate effort to keep a higher rate of collection. It suggests a RNR of 15-15.5 per cent with a dual rate of taxation at 12 per cent for some goods and the remaining at a standard rate of 17-18 per cent. The committee itself admits that the RNR is at best a guess estimate.
It mentions that among the 160 countries that have introduced VAT – and GST is a form of VAT – there are problems. Whether in the countries adopting single rate GST or double rate GST like proposed for India, there are challenges. Even among the large economies with federal structure, like European Union, Canada, Australia, Brazil and Indonesia, there are huge problems with implementation. I am not getting into implementation problems that are likely to appear but simply look at the additional burden that the common man will come under.
The report states that in a number of economies like Australia, Canada and New Zealand, GST implementation resulted in a steep inflation. To say that the rate of increase in prices will later come down, as has been seen in those countries, is nothing but economic jugglery. Take the case of prices of pulses. In Between June-October the price of common man’s dal zoomed from an average of Rs 70/Kg to Rs 170-200/Kg. If at present the prices have come down to Rs 120/kg, the rate of inflation is certainly lower considering the base level. But effectively, the prices have gone up from Rs 70 and have now stabilized at Rs 120/kg. Any further increase in dal prices next year will be measured from the base of Rs 120/kg.
In addition, a higher service tax creates a domino effect. Raising the service tax alone is a good enough reason for the price rise that is expected. The report has listed 24 services, including travelling, hospitality, entertainment, insurance, freight, repairs of building and machinery, royalty, professional/consultancy fees, telephone and gifts. This additional tax burden notwithstanding, the resulting rise in inflation in addition becomes an indirect tax. Therefore practically you get taxed twice.
Petroleum (only in initial years), electricity, real estate, alcohol are outside the ambit of GST. The report estimates that petroleum and alcohol are biggest revenue sources for the States fetching 29 per cent of overall indirect tax revenue and 41.8 per cent of total revenues of States to be subsumed under GST. Since GST will have a two tier structure – taxes levied by Centre (CGST) and others by States (SGST) – the duplicity alone will take away much of the advantage that is being cited. For instance, Finance Minister said in Parliament the other day that the day he lowered excise duty on fuel, he found many States raised VAT simultaneously.
So far we are only being made to believe that a maximum of 18 per cent will be the standard tax slab. But the fact that the Finance Minister is not willing to make it a Constitutional limit indicates that the upper limit is still open. Many experts believe that once the GST rate is fully harmonized the two rates to be followed would be a low of 12 per cent and a high standard rate of 22 per cent. There can be no denying that the probability for the service tax to be eventually raised to 22 per cent exists. This is the reason why the Government is not willing to cap the upper limit.
There was no hue and cry when the service tax was raised from 12.36 to 14 per cent this year. This was further raised by 0.5 per cent calling it a cess for Swatch Bharat. In such a gradual and phased manner service tax will be raised periodically so as to enable the consumer to absorb the additional tax burden. Jor ka jhatka dhire see, (buffer the blow) as they say.
What is therefore important is to ensure that the burden of a GST tax reform is not passed on to consumers. This must be explicitly stated in Parliament as well as in the GST Model Law that is being prepared. The only way this can be done is to put a cap on the upper limit of service tax. Since India is planning to adopt a dual rate policy – my suggestion is to club service tax along with the lowest rate of 12 per cent. The standard rate, which is likely to be 18 per cent, should be a flexible rate but the lowest slab should never be allowed to be raised beyond 12 per cent. Expanding the tax base and doing away with the numerous tax exemptions to Corporate, which is around 2.7 per cent of GDP, is a sure way to add onto tax revenues.