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Making GST a good and satisfactory tax for all

The Goods and Services Tax will transform how taxes are paid and collected. Designed and implemented right, it will change the face of Indian economy.

Puja Mehra | Print Edition: March 21, 2010

Scores of Union government taxes spanning excise and customs and an equal number or more of state taxes including sales tax, all merging into one tax-may be even one rate! An even larger number of laws on indirect taxes spawned by the legislatures of 28 states giving way to one simple and uniform law. Reams of invoices, records and documents replaced by one form that can be filed online.

Much cheaper products for the consumer (as the plethora of taxes disappears though prices of those products that aren't taxed right now could rise if they are brought under GST) and a government many times richer as collections (but not rates) go up. Each of these four statements spells magic, the promised magic of the Goods and Services Tax (GST) now scheduled to come in from April 2011.

 NOW

 THEN

  • Cumulative burden of all taxes: 22-24%.
  • Large companies have to deal with taxation laws and practices of 28 states.
  • Taxes on capital goods discourage savings and investments, retard productivity and growth.
  • Domestic producers disadvantaged by imports from lower-tax countries.
  • Cumulative tax burden could be as low as 12%.
  • Standard VAT invoice, one common law, market.
  • Zero incidence on capital goods will boost returns on capital.
  • Consumption-based taxation of imports to create level playing field for domestic producers.
The biggest tax reform in Independent India won't be without its share of confusion, chaos and controversies-much of which we have witnessed in the past couple of years. Yet, after February 25th and 26th, there was greater clarity than ever before on the future of the GST. On Feb 25th the 13th Finance Commission's report was made public (see pg 48) and on the following day the Budget set April 1, 2011 as the deadline for implementing the GST.

But will one year be enough to implement it? It better be, considering the spinoffs for the consumer, industry and government. Admittedly, the GST faces big hurdles in design, operations and infrastructure. On the design front, states differ on the rate structure and value, interstate transactions, and, of course, every state worth its border has its own exemptions, thresholds - and checkposts!

Operationally, the GST needs a common market, not 28 different ones. To back this, there has to be one law, one common assessment procedure and, of course, one form or return.

Then, to make the whole GST thing work, India needs a common information technology platform-and this at a time when states are in no hurry to implement even the Tax Information Exchange System. However, the FM said that the project to automate Central Excise and Service Tax had already been rolled out this year. The GST is the largest indirect tax reform of Independent India. It will cleanse the tax side of producers to release higher profits. It would also "reform the consumption tax in India," the task force on GST of the 13th Finance Commission said in its report released in December 2009.

COUNTING THE GAINS

  • 0.9 per cent-1.7 per cent jump in GDP in first year of implementation.
  • 3.2 per cent - 6.3 per centr ise in exports.
  • 0.37 per cent - 0.74 per cent rise in returns on capital.
  • 0.68 per cent-1.33 per cent rise in wage rates.
  • 0.42 per cent-0.82 per cent rise in returns on land assets.
  • $500 billion is the total estimated gain.
It is "not an exercise for additional resource mobilisation through discretionary changes": it can squeeze efficiencies out of the system. Consumers will know the exact tax component of goods and services they buy, compliance costs will plunge, and so will disputes.

The GST is a multi-point tax collected at each point of the supply chain (manufacturer, distributor and retailer), so it will be hard for any one distributor to avoid or evade the tax. A shopkeeper, by not reporting a sale, can only avoid additional tax payable on his value added-but miss the chance to recover the tax he paid to the suppliers.

But the gains could remain elusive unless states agree to cede the low hanging fruit-of taxes they levy and items they exempt- that power their revenues.

The states were so wary of the variables, the ifs and buts, that not much work was done on the framework and the government had to miss the first deadline of April 1, 2010. Another missed deadline could dilute the GST to a point where it becomes useless. Nor were the states enthused by the upside promised by the Union government- an extra Rs 70,000 crore that it said the GST would throw up.

So the empowered committee of state finance ministers had reached an impasse, but negotiations between the Union government and states are expected to resume. The ultimate carrot: A Grand Bargain of Rs 50,000 crore proposed by the Finance Commission to meet compensation claims of states for revenue losses due to GST from 2010-11 to 2014-15.

The GST in its current form has two rates, one for the Union government and the other for the states, both rates being low and revenue-neutral. The overall impact on individual producers and consumers would depend on the GST rate. With a revenue neutral rate, the overall tax burden will not change but there will be a significant shift in the distribution of tax burden across goods, services and sectors.

But an adulterated GST framework with differing taxes and rates would put paid to hopes of a common market. The states face another thorn: re-deploying their armies of tax collectors. One solution would be to redeploy them not as collectors but as facilitators.

The more successful models of GST, in Japan and Singapore, levied the tax initially at three per cent. New Zealand reported a revenue growth of 45 per cent with its low rate and simple structure.

The political squabble that is stalling the GST should not be too big a hurdle to cross since the GST endangers few votes, rather it is going to be easy to sell to most vote banks. The states' real concerns pertain only to loss of revenue and difficulty of harmonisation of the tax's administration which the Centre can help out with.

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