The implementation of the Goods and Services Tax (GST) is still mired in controversy and the Union government, in attempting to accommodate the objections of the states, has completely distorted this levy. If the basic objective is to generate more revenue for the states through a tax on services and for the Central government through a tax up to the point of retail, then it is far better to streamline and improve the existing system. It is difficult to comprehend the logic of trying to merge the Union and state levies. The implementation of the GST will be disastrous for seven important reasons:Violates the principle of federalism:
The Indian republic is federal in character and the Constitution envisages a great deal of fiscal autonomy to the states. List I, which is the Union List, contains Entries 82-97 which enable the levy and collection of various types of taxes such as customs duty, central excise, income tax, etc. The states have the power to levy sales tax/VAT, duty on alcohol, entry tax and other types of taxes mentioned in Entries 46-63 of List II. Central excise and sales tax constitute major sources of revenue for the Union government and the states. Merging sales tax/VAT with central excise will destroy the fiscal autonomy of the states. Today, each state government can decide the rate of sales tax and the exemption it wants to give; with the GST, there will be no such flexibility. In fact, this has been one of the major misgivings expressed by some of the states.Not suitable for a large, heterogeneous country:
GST is suitable for countries with homogeneous commercial and demographic features. Our states are even more diverse than the independent countries of the European Union. A sales tax system that is suitable for a state with rich mineral resources like Jharkhand may be totally unsuitable for an industrialised state like Gujarat or Maharashtra. The GST, as it is sought to be implemented, has the fatal flaw of trying to fit one glove for all sizes and shapes.GST will require an extremely complex tax system:
A discussion paper released in November 2009 indicated multiple GSTs - one for the Centre, one for the states and a third one, IGST, for inter-state transactions with possible multiple rates in each category. A complex system of input credits in inter-state transactions will lead to claims by "exporting" and "importing" states that are to be sorted out by some kind of a central clearing or regulatory mechanism. It also suggested three rates: 12 per cent for essential goods, 16 per cent for all other goods and 16-20 per cent for services - a fundamental and fatal flaw that will guarantee litigation and tax evasion. Alcohol and petroleum products are likely to be outside GST and there is no clarity on purchase tax or octroi. GST will thus require a complex regime of sections, rules, notifications, forms, circulars and clarifications.Constitutional and statutory amendments will be necessary:
The GST will require several amendments to the Constitution. Either certain
GST in place of the existing excise duty and sales tax is like replacing two buckets with a large number of holes with one large bucket with the same number of holes.
entries in the taxation list will have to be merged or there will have to be a new entry (perhaps Entry 92-D) for GST. These amendments will further complicate the law and will lead to more litigation. Systemic defects will continue: There is a fallacious assumption that once GST is implemented, it will lead to greater revenue generation, and a seamless indirect tax from the raw material stage to the point of last purchase will be a boon for everybody. Nothing could be further from the truth. Today, the fault is not with central excise or sales tax but the manner in which the laws are drafted or frequently amended retrospectively, the irrational and arbitrary administration of tax laws as well as the rampant corruption that exists in the department. It does not require any intelligence to realise that these systemic defects will continue with GST. Introducing GST in place of the existing excise duty and sales tax is like substituting two buckets with a large number of holes with a large bucket with the same total number of holes. The GST regime will be a failure as long as corruption, maladministration and arbitrary exemptions continue.Heavy rates will lead to evasion:
With the GST levels at 16-20 per cent, there is bound to be large-scale evasion. No housewife or common man, already battered by the high cost of fuel, electricity and other basic necessities, will be willing to pay 16 per cent tax at the retail level. The consumer is bound to purchase goods in cash and avoid payment of such tax. Internationally, the quantum of tax evasion is directly proportional to the rates of tax. It is shocking that all meetings and discussions on GST have forgotten this basic fact.Procedural monitoring will become difficult:
Implementing GST in a country with a population of one billion will require procedural monitoring at a staggering level. There is no indication of how the Central and state government employees are going to jointly administer it. What are the appellate mechanisms for deciding disputes? An enormous amount of paperwork will be needed to comply with the new regime of Central GST, State GST and IGST.A New Year Gift
The best New Year gift that the Finance Minister can give to the nation is to formally drop the disastrous proposal to introduce GST and retain the existing system of central excise, service tax and sales tax. There could be a huge increase in revenue if certain structural defects in the existing tax system are attended to. Applying the 80:20 rule, 80 per cent of tax evasion in central excise and sales tax takes place in 20 per cent of industrial and commercial activities. The excise and income tax departments knows where there is maximum evasion but refuses to act. Precious time and energy must be spent on better execution of the existing laws rather than repeatedly introducing new statutes.
In most industries, businessmen prefer to abide by the law, but imposing high rates of taxes, together with complex and incomprehensible laws and an unfair and unjust attitude of the tax administration, drives honest businessmen to abandon the path of rectitude and evading taxes becomes a compelling temptation. Therefore, what is needed is not altering the fabric of taxation but ironing out the creases.The author is a Senior Advocate in the Madras High Court