This is not the GST we wished for

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Taxes are complex, undeniably. Yet, a decade long debate on Goods and Services Tax (GST) has got the aam aadmi to realise that multiple taxes amount to price rise and also make doing business unviable and arduous. The popular support behind the GST was driven by the belief that a nationwide uniform tax regime will promote the ease of doing business and reduce price of products and services for consumers. However, India’s most sensitive tax reform has now become a victim of political tussle. The GST Bill, as passed by Lok Sabha, may fail to facilitate a uniform tax rate all over the country as a fresh round of wrangling has changed the contours of GST. This vital tax reform may finally end up stoking a price rise and creating utmost chaos in the tax administration.

GST has been perceived as a panacea to India’s illogical indirect tax structure. The existing system imposes a plethora of taxes on production, sales and services (excise, service, VAT, CST, Octroi, entertainment tax, luxury tax, purchase tax) which not only encourages tax evasion, but also adds to the cost of products. These multi-level taxes can be eliminated if GST is implemented in its true essence but it seems to have taken an opposite turn.

With PM Modi coming to power at the Centre, a glimmer of hope did return as Gujarat was the leading state among BJP ruled ones to oppose GST under his leadership. Nevertheless, things have not changed much despite BJP’s change of heart. Gujarat and Maharashtra have successfully pushed the case of levying one per cent tax on inter-state supply of goods in addition to the GST, which will not be returned to traders and producers. This tax will accrue to the state where the goods originate. It will increase the revenue of industrialised states while causing losses to other states. The additional duty, now part of the Bill passed by the Lok Sabha, has reignited the contention among states and forced the government to take the recourse of the parliamentary select committee.

Politics has significantly altered the picture of GST. Now there will not be a single-level indirect tax, but a five-layered structure. Central taxes will be levied under CGST (excise, service) and state taxes will be charged under SGST. An inter-state sale tax (IGST) will also be levied by replacing the Central Sales Tax (CST). There will be one per cent additional tax on inter-state supply of goods and apart from that a separate tax on petrol, diesel and aviation fuel.

GST was meant to introduce a unanimous tax structure across the country. It could have been fair even to have a separate integrated GST for the Centre and states. However, we are moving in the direction of opting for a five-tax structure in the name of GST, which is going to be no less than a mishap. In fact, under GST, producers and traders have to get a refund of tax paid by them on raw material and services, consumed during the production and sales of their specific line of business. This process will ensure single point taxation for products and services, thus reducing the risk of cascading taxation. Now that a multi-layered tax system is being put in place, the processing of thousands of tax refund requests will be a huge challenge on daily basis as tax machinery in the states are archaic and countrywide computerized GST network (GSTN) is yet to take shape. If GST is implemented in an ad hoc manner, it will only lead to disorder and loss of revenue.

What should be the rate of GST is again the biggest and most complicated question. The empowered committee of states on GST is indicating a 27 per cent GST rate (revenue neutral rate on which states will not incur any losses). This is ten per cent more than the present average rate of indirect taxation. If the GST rate is fixed above 20 per cent, then major tax reform may itself become a nightmare and further push the inflation. The GST rates across world ranges between five per cent (Japan) to 19.5 per cent (European Union). Seeing the ongoing row over GST, the government may find it extremely difficult to convince states to agree upon a lower GST rate.

It needs to be reminded that GST is not a headline-grabbing scheme or any centrally sponsored mission. It is India’s most cherished tax reform, which has been running into rough weather. As Parliament’s select panel formed to study the Constitutional Amendment Bill for Goods and Services Tax (GST) has started discussions with various stakeholders, the Union government must persuade all the players to come on board for a smooth nationwide transition to GST. Its implementation without complete preparation will incur more damage than having it at all.

Source: http://www.dailyo.in/politics/gst-bill-parliament-bjp-ruled-states-taxes-modi-government-indirect-tax-goods-and-service-tax-centre-states/story/1/3945.html

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