Who killed GST?

By | October 26, 2016

Who killed GST?

It is becoming increasingly clear that what was expected to be a game-changing reform by ushering in the goods and services tax (GST) may end up being closer to a name-changing exercise. This statement is likely to be perceived by some as an exaggeration, but just consider the facts.
The proposed GST regime was to have replaced a plethora of taxes paid at different stages with a destination-based tax to be levied at one or two different rates with the benefit of a set-off for the taxes paid out in earlier stages of the value chain. The idea was also to avoid exemptions so that the overall rates remained reasonable without being unduly inflationary.
But what you may actually have instead are seven different rates of taxation under GST. Government officials would of course have you believe that there would be only four rates of taxation — the lowest being six per cent, followed by 12 per cent, 18 per cent and 26 per cent on what are called demerit or sin goods including luxury items. What they do not count, however, are three more rates — a zero rate for items that will remain outside the new tax regime, a four per cent tax on gold and acess rate on the highest slab of 26 per cent, aimed at compensating the states for their revenue loss.
Even after assuming that there would be four rates – ostensibly to protect the poor from high taxes and to tax the sin goods at a higher rate – the multiplicity of tax rates, along with a long list of exemptions will be enough to damage the fundamental structure of GST. Four rates would inevitably give rise to classification disputes over what items should be taxed at what rates, allow discretion to the taxman and his political masters in deciding what rate should be levied on what items and, most harmfully, encourage business lobbying, often resulting in illegal gratification of a few powerful people in the system.
In contrast, all the problems arising out of classification of disputes, discretion and lobbying by vested interests could have been addressed by opting for two rates —one standard and the other lower to address concerns over inflation in basic essential items like food. Remember that most expert committees have recommended an average revenue-neutral rate of 12-18 per cent.
The committee headed by Chief Economic Advisor Arvind Subramanian has suggested a standard rate of 18 per cent and a lower rate of 12 per cent and explained that the inflationary impact under such a structure with a revenue-neutral rate of 15 per cent would be minimal. The committee has also convincingly argued that precious metals like gold should not be taxed at a low rate as now but at a higher rate as these are not items of purchase by the poor.
Yet, the die seems to have been cast in favour of a GST structure that will have at least four tax rates, several exemptions and a cess on sin goods. There are many other imperfections in the current proposal. For instance, the service tax could well be levied at three different rates, instead of just one standard rate (with 10 abatement rates) at present, which might give rise to a new set of classification disputes. The dispute between the Centre and the states over the jurisdiction of service tax assessment has not been fully resolved. The registration requirements for trade and industry are not yet fully free of complications. But these problems will pale into insignificance when compared to the larger problem of multiple rates, many exemptions and the continued levy of cess.
So, who is responsible for the GST dream turning sour? Is it India’s tax bureaucracy that continues to enjoy a tremendous clout in the administration of tax policy? Imagine a GST structure where there are only two rates for both goods and services, with virtually no exemptions and no cess! There will be no disputes over classifications and no scope for shifting some items from the highest rate to the lowest or the one above that. Discretion will go away. The tax appellate bodies will have less work.
Could it be that the revenue departments of the Centre and states were not comfortable with the idea of two rates and had argued that it would adversely affect revenue collections? For finance ministers, this would have been an alarm signal. No finance minister would like to lose revenue and widen the fiscal deficit. Some finance ministers in the states could have even seen merit in retaining the flexibility of multiple rates which would have given them the leeway to juggle around with rates to address concerns of specific interest groups. Finance ministers are also politicians and none of them probably would like the idea of a GST that could have been accused of having fuelled inflation. Hence, perhaps, their desire to keep a low rate and more exemptions, never mind that it would have undermined the spirit and long-term gains of GST.
Ranged against all these powerful forces was a lonely group of economists, who had headed committees to recommend fewer and reasonable rates under GST with a very small list of exempted items. Remember that the GST Council that is discussing and debating the rate structure and its secretariat have a preponderance of representatives of the revenue departments and finance ministers. For now, therefore, it seems the economists have lost out to the combined force of the tax bureaucracy and politics.  – www.business-standard.com[26-10-2016]

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