The Indian GST: What is needed

Image courtesy: indiamike.comThe bullish bear is back with a look at the Indian Goods and Services Tax (GST) legislation. With the observation that procedural simplification in the taxation system without taking a sledgehammer to taxation infrastructure is merely window dressing, concern is that, just like the enthusiasm surrounding the reduction in corporate tax rates (revenue neutral and phased in slowly) has fizzled out, the conundrum of the appease-all democratic mujra surrounding the Modi government’s trophy legislation, the GST Bill, may defeat its purpose entirely.

What’s the claim?

According to Finance Minister Arun Jaitley, the GST reform can boost economic growth by as much as 2 percentage points by way of introducing more efficiency in the movement of goods and services across state boundaries. It is also claimed that Automotive OEMs and logistics sector companies stand to gain as it may become easier to transport goods across India. However, the stock market drew mixed reactions, profit-taking, and amidst the disclosure of monthly volume numbers, the impact of the long-pending indirect tax reform on automotive stocks was unclear.

What is the process from here on?

The 122nd Constitutional amendment, having been passed by the Upper House (Rajya Sabha) with certain amendments, will have to be ratified once again by the Lower House (Lok Sabha), which should be a formality given the control of the House by the ruling party. The bill will then proceed to the state-level, where it will have to be approved by at least half of the states (simple majority). A detailed tax structure will then be appended and the legislation will once again go through the ratification process in the two Houses of the Parliament, followed by a presidential assent.

The earliest implementation of the GST will be by 1st of April, 2017 – and that’s assuming there are no technical hiccups on the technology side (The GST Network Company awarded a contract to develop & implement its system as late as November 2015 to Infosys.)

Issues

#1 Implementation issues encompass not only technology but also the lists of items to be included in the GST. The GST purportedly leaves out staples such as alcohol, petroleum, real estate, and there may be a separate higher levy on luxury items, which seems downright farcical! That’s right: let’s leave these utterly common items such as petrol and housing out, and then call it a unified tax structure.

Fresh concerns have been raised by the IT industry association, NASSCOM, which is claiming that the GST will replace the existing administration of single-point central service taxation with one consisting of as many as 111 different taxation agencies!

Moreover, if replacing 17 complicated state and federal levies with consolidated agencies at 3 levels (CGST, IGST, SGST) sounds complicated, it must be terribly more so to actually administer the system procedurally and technically. By April, 2017? And pigs can fly.

#2 The tax rate hasn’t been decided yet. If it is too low, the states will attempt to block the bill and legal ramifications could be very messy. If it is too high, the popular appeal of the GST will be lost entirely. Modiji’s BJP has to walk the tightrope with finesse – which cannot be taken for granted.

#3 Revenue-neutrality could scupper the longer-term benefits. If August 3rd was any indicator, political parties across the spectrum are willing to appease and to be appeased, except the AIADMK (the ruling party of Tamil Nadu, which stands to lose out as a primarily manufacturing state), but on the major condition that revenue neutrality be assured. Granted that satisfying a few tax authorities is easier than satisfying many, but without a meaningful reduction in the tax burden, this seems analogous to dealing with 3 kidnappers instead of 17, without any reduction in the ransom amount! And the 17 kidnappers are still there, enjoying the spoils with the first 3!

Take it to the limit

The issues discussed above aside, the whole objective of the GST is voided if the state-level infrastructure of taxation authorities is not dismantled. After all, what economic efficiency will we talk about if the overall federal level tax collection is unchanged and all these taxation authorities are preserved, still making a living off Indian businesses as earlier? Then, all the GST is, is calling for more bureaucracy at the center by concentrating taxation power, which until now, was dissipated among various states. To study the other extreme, if all the taxation power at the state level is demolished, the objective of revenue-neutrality will have been dealt with, implementation issues will be minimized, and there will be no tax rate to debate over! That is what a real tax reform should look like.

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2 thoughts on “The Indian GST: What is needed

    1. Thank you for your query.

      You are technically correct. However, practically, the impact of the excise duty will remain and be subsumed in the final GST Tax Rate (presumably around 18%), which will be decided by the GST Council sometime soon.

      It is my understanding therefore, at this point, that in the spirit of revenue neutrality, which I personally do not favor, various components of taxation, such as the excise duty, will live on. I hope this helps.

      Regards,
      The bullish bear!

      Like

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