The government’s concern about the impact of goods and services tax (GST) on the poor is extremely valid. The price burden on them should not increase
Augustus Caesar (63 BC-14 AD) was one of the most successful Roman emperors. He implemented a number of reforms, including of the taxation system, during his prosperous reign. His motto was Festina Lente—Make Haste Slowly. Conventional interpretation takes this to mean that you can achieve your objectives successfully and quickly only if you move forward in a methodical and considered manner. This oxymoron appears increasingly relevant in the context of the implementation of the goods and services tax (GST).
Why make haste?
We have to be a nation in a hurry to root out poverty by accelerating growth in our economy. As the NITI Aayog points out in its handbook Transforming India, a continuous growth rate of 7.4% over the next 16 years until 2032 will still leave us with about 5% of the population below the poverty line. It suggests that we should target a higher growth rate of 10%, which will make India a $10 trillion economy with no poverty by 2032. For this, it projects that the growth rate of the manufacturing and service sector should be 10-12%.
This is an admirable and worthy target, but we must keep in mind that even if we achieve such an ambitious target, growing at 10% every year for the next 16 years, our per capita GDP (gross domestic product) in 2032 will be only about $6,750. The world average nominal per capita GDP today is about $11,000. For achieving today’s world average in 2032, we will have to grow at 13.5% every year!
Clearly, we have to make haste, not only to remove poverty but also to enable a decent standard of living to all our citizens so that India can take its rightful place on the world stage. This also implies that India can no longer afford to exclusively tread the path of gradual, calibrated reform through an incremental approach. It has been more than 10 years since the GST was proposed in a budget speech. We now have to make haste to implement it, so that we can leverage the growth impetus it will provide.
The National Council of Applied Economic Research (NCAER) did a study for the Thirteenth Finance Commission on the impact of the implementation of GST on growth. The report indicated that a comprehensive GST would accelerate growth between 0.9-1.7% across goods and services. This is much needed.
There is still a school of thought which says that there needs to be adequate preparation for GST implementation—and rather than putting in place a hurried GST in April 2017, we should implement a well-prepared GST subsequently. There was a possibility of the proponents for delay and those arguing for implementing GST in April 2017 playing a game of chicken. In this game, the winning strategy is to throw away the steering wheel so that the oncoming car driver knows that you cannot swerve and therefore he has to. The finance minister has successfully thrown away the steering wheel by notifying all the sections of the Constitution (101st Amendment) Act on 16 September 2016. As per Section 19 of the Act, the GST has to be implemented within one year of the notification, since after this period the laws relating to the levy of excise, service tax and VAT (value-added tax), as we know it now, will no longer be in force. He has thus won the game, since GST cannot be delayed beyond September 2017. He is to be congratulated for successfully making haste.
In the matter of timing, we need to make haste. However, in the matter of the rate structure, we may need to move slowly and methodically. As management guru Stephen Covey insists, we must begin with the end in mind. What is the end we seek? An efficient GST structure which will accelerate the economy’s growth rate. What is the efficient GST structure which will be consistent with the government’s policy imperatives of Make In India, Skill India, Stand Up India, Startup India, and Digital India? A One India framework comprising One Indirect Tax, One Rate, and One Registration.
One indirect tax would be the GST. It is essential that all indirect taxes on all goods are subsumed into the GST. The provision in the Act empowering the GST council to include petroleum products in the GST base subsequently is therefore a welcome feature. We should also consider including alcohol for human consumption in the GST base at some point—with the caveat that such inclusions would be additionally subject to a special excise outside the GST.
One rate is a crucial part of the structure. It would enable the levy of a single low rate on a very broad and comprehensive base, eliminating litigation and rent-seeking on classification disputes, promoting voluntary compliance and ensuring simple and effective implementation. One rate does not imply one permanent rate. It can be amended relatively easily when required.
One issue on the levy of one rate which could possibly cause concern is the impact on inflation. This is because hitherto exempt items would now be subject to a significant tax burden, thus upwardly biasing inflation. There is an apprehension that the tax on the manufacturing sector (which will fall) will not be passed on to consumers—as was observed during the implementation of VAT—while the increased tax on the services sector will inevitably trigger higher costs and thus inflation. It has been argued that government should adopt a rate structure which does not adversely affect inflation. It has been further argued that the with food and beverages, clothing, footwear and housing carrying about 62% in the CPI (consumer price index) basket, and about 71% of the CPI basket already exempt from Central excise, it would be disastrous for the Central government to levy one rate on all these goods. It is finally argued that most of these essential items should either be exempted or be subjected to a low rate.
Keeping in mind revenue considerations, such analyses could additionally point towards a need for a multiple rate structure—say, four or five rates for the GST. These could include a 1% rate for bullion, a low rate for the hitherto exempted items under excise (but which were taxed under VAT), two standard rates depending upon the character of the goods, and a higher rate for luxury and sin goods. Such an analysis would indicate the creation of a five-rate structure and the creation of a pool of exempted items which may comprise a significant percentage of the total base. Such an approach would strengthen rather than eradicate the bogey of a complex, opaque, and unresponsive indirect tax framework. It would dilute the GST’s efficiency, weakening its growth-inducing characteristics.
The government’s concern about the impact of GST on the poor is extremely valid. The price burden on them should not increase. Yet, there are other ways of addressing this important issue than diluting the GST’s efficiency. Rather than providing exemptions for necessities to help low-income households, the government could use the Direct Benefit Transfer (DBT) system (through Aadhaar-linked bank accounts) to supplement their incomes. With Aadhaar covering more than one billion persons and 93% of all adults in the country so far, this is an extremely doable proposition. A DBT of Rs2,000 per annum to each individual below the poverty line (BPL) would more than offset any incremental impact of GST on her. Assuming 250 million potential recipients, the total budgetary cost of this scheme would be Rs50,000 crore per annum. By comparison, the revenue foregone by exempting necessities from the tax would be five-six times larger. State governments could be mandated to identify their BPL population using Aadhaar as the base. Allocations to state governments could be based upon nationally agreed state-level poverty figures. This DBT devolution mechanism could be expanded over time to include other social security schemes (some are being implemented thus already), rather than confining itself to providing compensation to the poor for any negative impact of GST.
Thus, there is a good case for the implementation of one rate in GST. What should the rate be? As commentators have pointed out earlier, while computation of the revenue neutral rate (RNR) for the Centre is possible, it is extremely difficult to compute the RNR for states given the lack of state-wise service tax data. The task force set up by the Thirteenth Finance Commission recommended an integrated rate of 12%—7% for the state GST and 5% for the Central GST. This could be a good place to begin. This rate will essentially be a leap of faith, with of course the proviso that it can be changed, if and when necessary, slowly and incrementally.
One registration is also a crucial component of the GST compact. With the advent of GST laws in 29 states and two Union territories (UTs) with legislatures, a national manufacturer will be required to register at 31 different places (not counting the other UTs which may separately require it) for collecting and paying state GST. This process will be cumbersome and time-consuming for a manufacturer who should be focusing more on Make In India. Modalities could be put in place for central registration under GSTN, with state governments having the liberty to cancel the registration in their states if the mandatory physical inspection of the dealer’s premises within a specified period reveals irregularities.
A single-rate GST with DBT and a single registration will significantly enlarge the constituency of winners. Businesses would be happy. Tax compliance would be simplified with one registration. The economy would prosper. Governments would collect more revenue through better compliance, and growth would be kick-started.
From all of this, we see that the balance of convenience lies in the implementation of a single-rate GST (say 12%) concomitant with a single registration authorization all over the country with a provision for a review of these provisions after a specified period of time—say three years. Let us make haste slowly while implementing the GST.