The Coming GST Disaster

By Ashwin Tombat
02 July 2017 18:10 IST

It was first mooted by the Atal Bihari Vajpayee-led NDA government. But as long as the Manmohan Singh-led UPA government was in power, the Bharatiya Janata Party (BJP) flatly refused to support GST. Among its most vocal critics was the then Chief Minister of Gujarat, Mr Narendra Modi.

After the BJP was elected in 2014, it had a quick change of heart and started to push the Goods and Services tax (GST) as the answer to all of India’s problems. Finance Minister Arun Jaitley has promised that it will bring a 2 per cent increase in India’s GDP growth. During his recent visit to the United States, Prime Minister Narendra Modi told a gathering of industrialists that GST was a “game changer”.

It is. But not exactly in the way that is projected.

The Goods and Services Tax aims to get rid of the current panoply of indirect taxes and to improve tax compliance in India’s complex indirect tax system, by replacing it with a more simplified structure. Taxes on manufactured goods such as Excise and Value Added Tax (VAT), the Central Sales Tax levied on inter-state trade and octroi, apart from some others, will all be replaced by a single tax – GST.

This single tax will be administered by a GST council consisting of the central and state governments. The Union government has one-third of the votes, while all states combined have two-thirds. But decisions are made by a three-fourths majority – which means that the Central Government, with its 33 per cent votes, actually has a veto. Even if all the states in the country together want something, the Centre can block it.

Under GST, the states have transferred almost all their powers of taxation to the Council. So why is Goa Chief Minister Manohar Parrikar rubbing his hands with glee? That’s because the Central Government has promised the states increased tax collection.

The GST’s other cheerleaders are India’s big industrialists – popularly known as India Inc.

Big businesses operating in a large number of states find it difficult to navigate India’s multitude of taxes. Having to pay only one tax really eases things up – for them. But there is more to India than the Central Government and large corporations.

If abolishing state taxes is the key to efficient markets and economics, why is it that the United States – the largest capitalist economy in the world – or the European Union – the second-largest – have not done so?

In India, the states do most of the actual governance. The Police, Education, Healthcare and Agriculture are all state government responsibilities. If states don’t get to control their access to funds by deciding on their taxes, it is bound to lead to major problems. Let us say Goa’s voters bring in a government because they want more public services and they don’t mind paying more taxes. In a GST regime, the chief minister will not be able to change tax rates, unless (s)he can convince the GST council.

What about Micro, Small and Medium Enterprises (MSME)? It is these companies that create the bulk of India’s employment and pay most of its indirect taxes. But GST will only add to their compliance cost. A business has to file 37 returns in a year (three returns per month and one annual return) per state. A business operating in three states will have to file 111 tax returns in a year.

Experts believe that GST may kill a lot of small and medium enterprises (SMEs) as they will not be able to manage the high cost of GST compliance considering their slender profit margins. The big industries may rejoice, as this leads to less competition from “unorganised players”, but the end result may be huge job losses nationally.

Multiple rates for different products is another problem. A concrete example: a boat builder has to pay 28 per cent GST on purchase of engines, but can deduct only 5 per cent GST on sale of boats. The engine is around 60 per cent of the cost of the boat, so a large tax credit remains with the government, playing havoc with the boat builder’s cash flows.

Most countries that successfully levy GST have a single rate structure, which allows for easier tax administration. Only 10 per cent have multiple rates. India, sadly, has chosen to be among them...

Finance Minister Arun Jaitley who, like his predecessor P Chidambaram, has spent most of his life being a high flying lawyer for big corporations, would have done well to listen to the maverick politician but often sensible economist Subramaniam Swamy: “GST at the present would be a disaster. I have written to the Prime Minister urging... that there is no hurry in this matter...

I therefore think that the best time to bring in GST would be after the 2019 election.”

 

Blogger's Profile

Ashwin Tombat

Ashwin Tombat has been the Editor of Gomantak Times and Herald. Worked as an Associate Editor of national magazine Gentleman in Mumbai, before shifting to Goa. Loves sailing, also participates in Marathons. Has worked as an activist in students's union and trade unions in Maharashtra. Also an artist of Street Theatre during student days.

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