Contrary to the claims of Finance Minister Arun Jaitley, the current model of the GST is unlikely to add two percentage points to GDP growth.
Authour : http://ccs.in/people/seetha
Did tax reform expert Satya Poddar let out something when he said at a conference on goods and services tax (GST) – the third in a week – that there could be another, improved version of the GST model set out in the currently stalled Constitution amendment Bill perhaps in the budget session?
Two government representatives – the special secretary, revenue, in the finance ministry and the chairman of the Central Board of Excise and Customs – who spoke before Poddar gave no such indication. But Poddar, who heads the tax advisory group at consulting firm EY, is someone who is familiar with all developments on this crucial tax reform, and his words cannot be dismissed as kite flying.
If true, this could mean a further delay in the rollout of the GST regime. Changes in the Bill may require it to go back to the Lok Sabha (the current Bill has been cleared by the lower house and its passage in the Rajya Sabha has been stalled). It is only after this that the state governments can take it up.
Will a further delay be an unmitigated disaster? The government and India Inc. would like everyone to believe that it will, but fiscal and tax experts don’t share this view.
Poddar believes that the delay in the passage of the GST Bill is a blessing in disguise which will allow a reworking of the GST structure being envisaged. Like him, M. Govind Rao, former head of the National Institute of Public Finance and Policy and member of the Fourteenth Finance Commission, also pointed out that the GST regime envisaged by the Constitution amendment Bill was extremely flawed and could not be the game-changer everyone was expecting it to be. “Even if the Bill is passed today, it will not bring the benefits it is expected to. Let us keep our expectations low,” Rao said at the conference. Both of them, incidentally, have been involved in India’s tax reform since the early 1990s.
The current model, Poddar said, is not workable and even if it is somehow made workable it will not deliver the 2 per cent boost to GDP that that finance minister Arun Jaitley has been claiming it will.
Rao went a step further and questioned the 2 per cent claim. He pointed out that a study by the National Council of Applied Economic Research (NCAER) had predicted that GST will give a 0.9-1.7 per cent boost to GDP. But this, he said, was based on 2003-04 input-output ratio, assumed a flawless GST and worked out efficiency gains on that account. The gains that GST will bring will depend on the kind of structure of the tax regime, he asserted, noting that a flawless GST is a mirage.
Poddar noted that the report of the committee on revenue neutral rate headed by the chief economic advisor had been mandated to calculate the RNR based on the impact of GST on GDP. But going by the calculation, he pointed out, the report assumes zero improvement in GDP. Rao, too, took a swipe at the report, noting that it had arrived at its macro estimates based on the international experience. That, he said, is not relevant in the Indian context because the structure of the Indian GST is different.
What exactly is wrong with the current model of GST?
The big flaw, according to Poddar, was that is based, not on cooperative, but coercive federalism, requiring complete uniformity by the centre and the states. “That may be desirable for the tax payer but it is fundamentally at odds with the model of federalism where the two levels of government have the autonomy to design their tax systems,” he said. The states naturally wanted freedom to keep certain items out of GST and the number of exempted items has gradually widened.
Poddar also calls the IGST (integrated GST for inter-state transactions) a disaster because its calculation and levy have been rendered extremely complicated. “Don’t underestimate the complexities that are embedded in the IGST design,” he warned.
Rao listed the many challenges that have to be addressed when implementation of GST begins, apart from setting up a GST Council and working out a dispute redressal mechanism. Some of these challenges will revolve around thresholds for application of GST, place of supply rules, modalities to deal with infirmities (special economic zones, area-based incentives), issue of e-commerce. One major issue that has not been dealt with at all is preparing the tax payers, he pointed out. GST will not help get over the problem of trade diversion (where trade moves to states with a favourable tax structure), he argued.
Rao, however, stops short of asking for the current model to be junked. “We should take it as the next stage of reform. Any reform in this country cannot be an event, it is a process and we should take it as such.”
Now if only people in the government and the opposition listen to these two wise men.