How to make GST fair and simple


Exemptions, which are supposed to be propoor, should be re placed by direct benefit transfer.

Conflicting demands of different stake holders make tax re form the art of the impossible. While
the gainers are silent, the vociferous cacophony of the opponents drowns the voice asking for bold
and imaginative re form. It there fore comes as no surprise that the Union finance minister has had to
abandon most essential features of the transformational goods and services tax (GST) reform. Bound
by the constraint of his 30 col leagues in the GST Council wedded to the legacy system, he is forced to
follow the path of mediocrity.

The unanimous passage of the Constitution Bill in Parliament had revived the hopes that Prime Minister Narendra Modi could well make impossible possible and deliver a GST that met the triple objectives of fairness, simplicity, and economic growth. However, the proposals of the GST Council meet none of these objectives.

The positive impact of GST on economic growth will be a result of the removal of cascading of  taxes, i.e., non creditable taxes on investment and production in puts. No cred its are allowed for input taxes where the sectors are exempt from tax. The blocked credits add to the cost of investment, and hinder economic growth.

Following the methodology adopted by the GST Council for revenue and inflation impact analysis,
we estimate the quantum of cascading taxes to be ~3.2 lakh crore (or 36 per cent of the ~8.8 lakh
crore of revenues in 2015-16 to be subsumed under GST) under the current system.

With 50 per cent of the consumption basket remaining exempt from tax under the GST Council
proposal, cascading taxes will go up (not down) marginally, to 39 per cent of total revenues. As a result,
the positive impact on GDP would be negligible, less than 0.5 per cent.

The objective of simplicity will also remain a mirage if the multirate structure and the model GST law are adopted. If anything, complexity may go up during the transition. The model law requirement of statewise registration will multiply the compliance burden for pan India service providers by a factor of 30. Despite extensive representations by the industry, the states have refused to adopt a single centralised registration system.

The multirate structure will com pound the complexity. The impact would be the worst on the SMEs who are ill equipped to manage classification of goods in multiple baskets. Kirana store dealer will have goods in all five baskets (exempt, five per cent, 12 per cent, 18 per cent, and 28 per cent). The tax rates will differ for similar products. Bread may be exempt, but other bakery products tax able at a merit rate. What will be the fate of chocolates, biscuits, and fruit bars? The same products bought at a restaurant or fastfood out let may at tract tax at the 18 per cent rate for services. Consumer durables will attract 28 per cent tax when bought, but only 18 per cent when rented as a service. Taxation of mobile phones has already been a matter of controversy. Should they be taxed as telecommunication equipment, cameras, or computers?

Fairness is the principal reason for the adoption of the multirate structure. Finance Minister Arun Jaitley defends the four tiered structure by stating that air conditioners and chap pals can not be taxed at the same rate. True, but those with air conditioners also buy chappals. The benefit to them of a lower rate would, in fact, be substantially more sim ply be cause they spend more on them.

The ultimate test of fairness is not the tax rates applicable to individual products, but the over all
distribution of the tax burden across lower to up per-echelons of society. Surprisingly, the fourtiered
structure approved by the GST Council results in a higher tax bur den on the bot tom 30 per cent of the
consumers. EY estimates show that the bot tom 30 per cent of consumers ac counts for 12 per cent of
total consumption spending, but contribute 12.6 per cent to the total taxes on final consumption. Under
the fourtiered GST rate structure, their contribution to total taxes goes up to 12.7 per cent. Viewed
from this perspective, the new rate structure worsens the fairness of tax.

This result is not unique to GST reforms in India, but common in most jurisdictions with multirate
structures. Lower rates for basic necessities do not improve the fairness of tax, and of ten worsen
it. The rich benefit from the lower rates more than the poor sim ply be cause they spend more (on
items in all rate categories) than the poor.

So, what can be done? The only op tion to im prove the fairness of GST is to re place exemptions
and lower rates by a targeted in come sup port pro gram for lower income cosumers. As suggested by Kelkar, Poddar and Bhaskar (in ‘GST: make haste slowly, Mint, October 19, 2016), this could be in the form of a direct benefit transfer (DBT) of, say, ~2,000 per head per annum for the bot tom 27 crore (bot tom two deciles of the population). This program would have a cost of ~54,000, which would be a fraction of the cost of exemptions in the GST Council formulation. The GST could then be levied at a single rate of 12 per cent on a broad base, with a supplementary cess on selected demerit and luxury goods. The contribution of the bot tom 30 per cent to GST revenues would then fall to 5.4 per cent, from 12.7 per cent under the multi rate structure.

The single rate will be propoor, bring in simplicity, and spur in vestment and economic growth.
The GST Council must face up to this re al ity and decide. It can either sacrifice simplicity and economic
growth for all at the al tar of keep ing a few happy, or take the bold step of adopting an alternative
that gives all the three advantages of simplicity, fairness and economic growth.

Souce: Business Standard

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