If you are a proponent of the Goods and Services Tax (GST) - often lauded as the biggest reform that will curb black money generation, improve tax collection and propel GDP growth in India, Ground Scorching Tax by well-known economist and academician Arun Kumar could be an eye-opener. The book, mostly a low-down on the new indirect tax regime that India adopted two years ago, pricks a few GST bubbles as it underlines execution issues, structural weaknesses and the deep discriminatory impact at the ground level. Kumar, an authority of sorts on black economy, further argues that claims made by experts on the benefits of GST are not supported by macroeconomic analysis.
To begin with, the widespread assumption that GST would lead to higher (tax) collections and lower prices, as well as higher outputs, is contradictory. The author proves his point with the help of macroeconomic analysis and states that it is not possible to have increased tax collections without sending prices northward, no matter how you see it.
He has also rejected two other 'theories' pushed by GST advocates. One sweeping assumption is that the entire production and distribution chain could be brought under GST. Kumar has, however, explained why the vast unorganised sector finds it extremely difficult to operate under an inordinately complex GST in spite of the exemptions granted by the GST Council, the decision-making body comprising Union and State Finance Ministers.
Just take a look at the massive number of changes, postponements and delays (including change in tax rates and exemptions), multiple levels of levies and thousands of return filings. You would quickly realise why a sector that employs 93 per cent of the workforce, manufactures 45 per cent of the output and operates in an ad hoc manner, without access to data, digitisation or a structured business format, is crumbling. Worse still, it can lead to shrinking consumption, flat food prices and agrarian distress.
Another claim is that GST would curb the generation of black money in a big way. Again, Kumar points out why GST could not do it as expected. For one, it is impossible to stop businesses from over-invoicing or under-invoicing. Plus, a parallel system may emerge where previously undeclared part of medium-to-large companies continues to exist with GST-exempted businesses.
Interestingly, Kumar has not lost sight of the historical perspective of this 'very difficult' tax. A GST-like tax was first proposed by the Taxation Enquiry Committee in 1978. The book chronicles the events that ultimately led to the current regime. But the journey does not provide much relief as the sombre subject is strictly rooted in macroeconomy and public finance. Still, it is refreshing to know that India was toying with these ideas 40 years ago.
The author has not minced words when looking at key issues such as design flaws of the new system, the states surrendering their tax sovereignty and lack of credible macroeconomic data to measure the impact of GST on the unorganised sector. The socio-political implications are grim, but the writer has also provided a brief glimpse of an alternative system.
"Can GST be reversed?" asks Kumar. "Clearly, the previous system was also not satisfactory since indirect taxes are stagflationary and there was a multiplicity of these taxes. It is better to collect more of direct taxes. India pays very little of those in spite of the high level of disparity. The well-off sections can indeed pay a much larger per cent of GDP as direct taxes if the black economy could be checked. So, the first part of the alternative is to collect a lot more from the direct taxes by checking the black economy."
The second part is to simplify the tax. "GST is a destination tax, paid by the final consumer and also collected by the state where the final consumption takes place. Since the complexity of GST arises due to the various intermediate stages of transactions, sales, production, transportation, accounting and so on, why not simplify the tax by eliminating the intermediate stages of tax? Further simplification would arise if it is levied as ad valorem rather than VAT. Since no tax is levied on intermediate stages, this tax would be equivalent to VAT," he writes.
The author has tried his best to balance his arguments for and against GST, but at times, he repeats himself and the failures of the new tax structure appear to be the most dominant theme. But what matters most is understanding the gap between concept and implementation. If issues are left unaddressed, fiscal federalism can easily be dented and the fast-developing distance between big and small businesses may slowly crush the huge and diversified economy of India.
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