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Should we really have centralized GST against diverse needs of states? Won’t it be more inflationary?

By Shivaji Sarkar

The proposed Goods and Services Tax (GST) is a complex law. It empowers the bureaucracy more, increases cost on it and the supposed benefits to industry or the people are illusive. As drafted it looks more a bureaucratic document. The political intent is good but it is likely to get lost in bureaucratic quagmire. People of India may have a harrowing time once such a law is enacted.

The expectation that it would bring down the tax rates and make goods and services cheaper may also get belied. It may be more inflationary than the present tax regime. When sales tax was replaced by VAT a similar argument of reduction in taxes was given. The VAT, in effect, increased the tax manifold.

The GST would be applicable on supply of goods or services as against the present concept of tax on the manufacture or on sale of goods or on provision of services. It is destination based tax against the present on the origin of goods. It plans to tax every untaxed item though conceptually GST subsumes various central indirect taxes including the central excise duty, countervailing duty, service tax and state value added tax, octroi and entry tax, luxury tax. But it leaves liquor for human consumption, petroleum products and centre reserves the right to levy any additional tax above the agreed rates.

Some richer states like Gujarat and Maharashtra want the powers to levy additional taxes exemplifying the discontent. Smaller states are not satisfied at the compensation. They want more. The centre ultimately would be buying more problems instead of simplifying the system.

As per central Board of Excise and Customs (CBEC), the agency that would be administering the GST, present combined indirect tax rates are around 25 to 30 per cent. It is a guess and not an exact assessment. The new “combined” tax rates are not known – the bill is silent on this aspect. It has been left to the proposed GST council. But the departmental sources indicate that the GST would not be less than 26 per cent, considered high even by those who were instrumental in drafting the law. It is not the end. The centre has reserved powers to levy an additional 1 per cent tax on inter-state movement of goods. The rational is not clear. The trade body Assocham has opposed it.

It is likely to include many more goods and services to fulfill unsatiated demand of the state to have more revenue. The bureaucratic glee is visible.

The natural corollary would be increase in prices of goods and services. There may be a chaotic market situation. The chaos is not restricted to the concept of the common law. It proposes to tax almost every destination based sales and that is likely to affect the farm goods, food grains, handicraft, even local market –haat- in a massive way. It is also not clear how the destination would be defined or decided.

It is also apparently a myth that the taxation procedure would be simplified. The GST itself is not one tax. It is a combination of three taxes – central GST, state GST and integrated GST for inter-state dealings. In reality, it is having multiple taxes as it is now but the right of collection is to be vested in the centre. The states would be reduced to dependencies.

Will it reduce disputes? The CBEC envisages that accounts would have “to be settled between states periodically”. Since there are 29 states and seven union territories this would be an enormous continuing procedure. In short, it would be an endless centre-state dispute. States possibly rightly have reservations over GST. It is likely to add to cost of tax administration as well and that burden would ultimately be passed on to the people.

The CBEC estimates that it would have to increase its staff manifold.

The bureaucrats are likely to have more discretionary powers as disputes are likely to increase as per a CBEC paper. That is where the bureaucrats trade the most. It is no secret how honest the officials in income tax and related revenue departments are.

It may open up avenues for harassing petty businessmen all over the country. Big businesses see it as simplification of their procedures as they hope it would be virtually a one-window tax payment system. In reality, it may not be so.

The CBEC says that there are surfeit of laws, regulations and procedures for levy and collection of CGST and SGST. It is difficult to harmonize these.

On December 22, 2014, parliamentary consultative committee demanded publishing of a consultation paper before the GST is rolled out to clarify various issues.

Often GST of Canada levied at 5 percent and Asia-Pacific region having 10.88 percent  are cited as instances of ease of business. But European Union countries, according to KPMG, have the highest GST or value added tax (VAT) of around 19.5 per cent. Latin America has 14.2 per cent and OECD countries 17.7 percent.

The world’s highest indirect taxes are found in Sweden, Norway and Denmark. The US does not have a GST.

Trade body Federation of Indian Chambers of Commerce and Industry (FICCI) emphasises on clear classification of goods and services, meaning presently they are vague in many cases, and one simple rate – suggesting that the 1122nd Constitution amendment bill has ambiguity in these areas.

It is true states have varied tax laws. The states also have varied topographical, cultural and business peculiarities. The centralized tax proposes to ignore these special needs of the states. It wants to subsume diversity in a centralized structure. It may benefit some richer states but may harm remote north-eastern and other backward states.

The GST process has also not taken into account the redundancies it would create among tax-collecting staff in states. Should they be sacked?

It also has not assessed the additional cost on the centre. It would be two-fold – on larger administrative infrastructure and the need to appoint additional staff. The CBEC admits it but has not made any assessment of the additional expenditure. On a rough but conservative estimate, the centre may have to bear at least an additional cost of Rs 1 lakh crore. Is GST really a viable solution?

India needs simplification of taxes. It should better be worked out between the centre and the states through negotiations. It requires a decentralized solution not a monolithic structure.

 

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