GST inflationary & against States

Centralised GST

It will be counter-productive

• Applicable on supply of goods or services as against present concept of tax on manufacture or on sale of goods or on provision of services.
• It is destination-based tax as against the present on the origin of goods.
• Conceptually it subsumes various Central indirect taxes, but it leaves out liquor for human consumption, petroleum products
• The new “combined” tax rate is likely to be around 26%, which considered high. It is not the end.
• Centre reserves the right to levy any additional tax above the agreed rates.
• Bureaucrats may have more discretionary powers as disputes are likely to increase as per a CBEC paper
• Centre may have to bear at least Rs 1 lakh crore expenditure more on the GST count. Is GST then really a viable solution?

The proposed Goods and Services Tax (GST) is a complex law. It empowers the bureaucracy more, increases costs and the supposed benefits to industry or the people are illusive. As drafted it looks more like a document wrapped in redtape. The political intent is good, but it is likely to get lost in bureaucratic quagmire. People of India may have a harrowing time once such a law is enacted.

The expectation that it would bring down the tax rates and make goods and services cheaper may also get belied. It may be more inflationary than the present tax regime. When sales tax was replaced by VAT, a similar argument of reduction in taxes was given. The VAT, in effect, increased the tax manifold.

The GST would be applicable on supply of goods or services as against the present concept of tax on the manufacture or on sale of goods or on provision of services. It is destination-based tax against the present on the origin of goods.

It plans to tax every untaxed item though conceptually GST subsumes various Central indirect taxes including the Central excise duty, countervailing duty, service tax and State value added tax, octroi and entry tax, luxury tax. But it leaves liquor for human consumption, petroleum products and the Centre reserves the right to levy any additional tax above the agreed rates.

Some richer States such as Gujarat and Maharashtra want the powers to levy additional taxes exemplifying the discontent. Smaller states are not satisfied at the compensation. They want more. The Centre ultimately would be buying more problems instead of simplifying the system.

As per the Central Board of Excise and Customs (CBEC), the agency that would be administering the GST, the present combined indirect tax rates are around 25 to 30 per cent. It is a guess and not an exact assessment.

The new “combined” tax rates are not known – the Bill is silent on this aspect. It has been left to the proposed GST council. But the departmental sources indicate that the GST would not be less than 26 per cent, considered high even by those who were instrumental in drafting the law.

It is not the end. The Centre has reserved powers to levy an additional one per cent tax on inter-State movement of goods. The rationale is not clear. The trade body ASSOCHAM has made its opposition known.

The Bill thus is likely to include many more goods and services to fulfil the unsatiated demand of the State to have more revenue and a slimy bureaucratic glee is visible. The natural corollary would be an increase in prices of goods and services. There may be a chaotic market situation. The chaos is not restricted to the concept of the common law.

It proposes to tax almost every destination-based sales and that is likely to affect even the farm goods, food grains, handicraft, even local market –haat- in a massive way. It is also not clear how the destination would be defined or decided.

It is also apparently a myth that the taxation procedure would be simplified. The GST itself is not one tax. It is a combination of three taxes – Central GST, State GST and integrated GST for inter-State dealings. In reality, it is having multiple taxes as it is now but the right of collection is to be vested with the Centre. The States would be reduced to dependencies.

Will it reduce disputes? The CBEC envisages that accounts would have “to be settled between the States periodically”. Since there are 29 States and seven Union Territories, this would be an enormous continuing procedure.

In short, it would be an endless Centre-State dispute. The States possibly rightly have reservations over GST. It is likely to add to the cost of tax administration as well and that burden would ultimately be passed on to the people. This apart, the CBEC estimates that it would have to increase its staff manifold.

The bureaucrats are likely to have more discretionary powers as disputes are likely to increase as per a CBEC paper. That is where the bureaucrats trade the most. It is no secret how honest the officials in the Income Tax and related revenue departments are.

And this may open up avenues for harassing petty businessmen across the country. Big businesses see it as simplification of their procedures as they hope it would be virtually a one-window tax payment system. In reality, it may not be so.

The trade body, Federation of Indian Chambers of Commerce and Industry (FICCI) emphasises on clear classification of goods and services, meaning presently they are vague in many cases, and one simple rate – suggesting that the 122nd Constitution Amendment Bill has ambiguity in these areas.

The GST process has also not taken into account the redundancies it would create among tax-collecting staff in States. Should they be sacked? Further, it has also not assessed the additional cost on the Centre, which would be two-fold – on larger administrative infrastructure and the need to appoint additional staff.

The CBEC admits so, but has not made any assessment of the additional expenditure. On a rough but conservative estimate, the Centre may have to bear at least an additional cost of Rs 1 lakh crore. Is GST then really a viable solution?

India needs simplification of its taxes. It should better be worked out between both the Centre and the States through negotiations. It goes without saying that it requires a decentralized solution not a monolithic structure.

Incentivising States

As tax rates during the (GST) regime will be closely aligned to the Revenue Neutral Rates (RNR) of the Centre and the States, the revenues of the Central and State governments will not be impacted in the long run. To help States in the transition phase, the Constitution (122nd Amendment) Bill, 2014, which was passed by the Lok Sabha and to be approved by the RS, provides for;

• Levy of an additional tax of goods, not exceeding one per cent in the course of inter-state trade or commerce to be collected by the Centre for a period of two years, and assigned to the States from where the supply originates;

• Compensation to the States for loss of revenue arising on account of implementation of the GST for a period which may extend to five years;

• In the case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of the GST till a date notified on the recommendation of the Goods and Service Tax Council.

(This was stated by Arun Jaitley, the Union Finance Minister, in written reply to a question in the Rajya Sabha on Thursday)

By Shivaji Sarkar