For close to two years now, Revenue Secretary Hasmukh Adhia has kept the implementation of GST on top of his list of priorities. His mission is very close to fruition now. Earlier this month Adhia explained the nuts and bolts of the new tax regime to readers of The Indian Express in Part I of this special Explained event, in New Delhi.
What is so transformational about GST? We have heard that it is the biggest indirect tax reform since Independence. In what manner will it transform India’s entire tax structure?
If you see the value chain from raw material to retail, today, it’s fractured for the purpose of taxation. The manufacturing part of the value chain is taxed by the Centre, and the trading part is taxed by the states. Because it is not integrated, there is a disconnect. Now, what The Constitution (122nd Amendment) Bill (GST Bill) does, is it de-fractures and integrates this entire value chain for the purpose of taxation. States can tax manufacturing, the Centre can tax trading, and states can tax services. So both the Centre and the states will concurrently charge duty on the entire value chain, and that’s your dual VAT, that is, the Central GST and the State GST.
Now, what is the implication of this? Substantial amount of non-compliance takes place in the trading section of the value chain. That is going to come down because they are going to declare more transactions in order to avail the credits earlier. That is the transformational aspect of GST. The second transformational thing is abolition of Entry 52, which is the entry tax. We are one political nation since 1947, but we are not one common market. It has been estimated by economists that 16% of a truck’s time carrying goods is spent at checkposts. So what the end of entry tax does is, goods can freely move, and hopefully there will be fewer traffic snarls as well! And all the other taxes like luxury tax, entertainment tax, purchase tax have been abolished and subsumed [into the GST].
Read Part 1: Not a single state has told us we are not doing GST. They are all on board, says Hasmukh Adhia. Click here
What about the multiplicity of rates? We started with one rate; today there are so many. Does it take away from the GST?
People fear the multiplicity of rates may create disputes. I would like to say it will not create disputes of classification and valuation because each product is uniquely defined in terms of an internationally accepted nomenclature. States which, in their state VAT, were not following HSN (harmonised system of nomenclature), will now start following the HSN, which is very useful because whenever you export goods, the world over it is known only by its classification.
But conceptually, I feel this whole argument of the rich and poor for taxation is flawed to some extent. My own view is that a lot of the goods that the rich consume, the poor make. So this whole thing that if you tax the consumption of the rich you are helping the poor doesn’t work on the indirect tax side. For example, we go to a 5-star hotel, the security person there is from [say] Darbhanga in Bihar, the waiter is from [say] Jharkhand, the cook is from [say] Odisha or Bengal, so what are you trying to do by saying I am taxing the rich who go to hotels is indirectly affecting the poor. So what I wrote in a recent article is, this rich-poor dichotomy for taxation, at least on the indirect side, is flawed. We should have one single rate. But taxing the rich — you should do that through direct taxation, by bringing them into the tax net and taxing them progressively. Indirect is a bad instrument to achieve socioeconomic objectives. It cannot do it, it distorts by its very nature.
There are low-income states and high-income states; there are the producing states and there are the consuming states. Do you think GST addresses the issue of equity in some manner?
Yes. In fact, one of the things that GST is going to do is that poorer states are going to get a far higher revenue growth, because they are destination states or consumption states. This a great thing. Bihar was the first state to pass the GST legislation. There are estimates to show that the growth rate in UP and Bihar, the compensation rate that the Centre has worked out is assuming about guaranteeing 14% over the 2015-16 base. But UP, Bihar may do even better. There are some estimates that revenue may grow at 25%. On the other hand, the richer states, the organised manufacturing states like Maharashtra, have said that our revenues are going to be affected. Now, that also is not true — because the rich manufacturing states are also service tax hubs, so what they lose maybe on CST (central sales tax), which is an origin-based tax, they will gain on services. Maharashtra has Pune and Mumbai, Karnataka has the Bangalore service tax hub, Tamil Nadu has Chennai. We did a study in Maharashtra, and found that from octroi, Maharashtra collects Rs 15,000 crore, but the service tax accruing to Maharashtra as destination state will be about Rs 20,000 crore to Rs 25,000 crore. So all states are going to grow, but the poorer states will grow at a faster rate in terms of growth of revenue, which is not a bad thing, because they are growing on a low base.
The other aspect is that GST does not cover everything; for instance, portable alcohol, electricity, real estate have been left out. Does this distort the integration of a national market, because transport is a very critical element, and fuel has been left out?
Actually, we have lost an opportunity to really have a very wide GST base, which was the recommendation of the Thirteenth Finance Commission. Today, we have come only halfway. GST is applicable to under-construction flats and commercial buildings, not when they are completed. But you could have taken that audit trail and the chain right into the next stage. And all the cement and steel duties could have been given as input credit, you would have had a whole chain, and you would have actually known the extent of real estate transactions in India.
But I am told the Finance Minister wants to do it in the second round. His point is let the camel enter the tent, let’s first get GST in. But you are absolutely right, the base of GST has been reduced, and the full advantages of the tax we have not been able to get.
So many items of mass consumption which are part of the CPI (consumer price index) are either zero rated or are at 5% GST rate. Do you see prices of items of mass consumption not rising?
In fact, there is now a feeling that this may be deflationary. Prices may actually come down. GST may actually bring about a reduction in duty on the goods side. The biggest gains are in food. I am told the abolition of purchase tax and mandi tax, the kind of taxes that the farmer had to pay, is going to give a big boost to agriculture on the food side. The whole intermediary chain between farmer and buyer is going to be de-layered. That’s a big benefit. For example, everybody said Madhya Pradesh is the big agriculture story, so why are they facing farmer riots? The answer is they are paying the price of overproduction without providing storage opportunities and, therefore, the remunerative prices have fallen. Good things happen, but unless they are complemented with other measures, you can’t do anything. You need a good storage mechanism. Maharashtra has had record production of pulses, tur, in Marathwada, but they have not procured it to the extent it was promised. Prices have crashed, and the anguish is more because production is so good.
Read: Meaning: Anti-profiteering. Click here
What about evasion? Do you think GST actually brings everybody in the tax net?
Pre-GST, the trader cheated because he was not eligible for many credits, as only VAT credits were available. So the trader bought from somebody who was also exempted from VAT. Exempted-to-exempted transactions living in the shadow economy were going on. Now, he will be eligible for credits of central duties paid on input goods, for central duties paid on input services, for duties paid on countervailing duty side on imports. If he doesn’t declare his transactions, he will lose all these credits. So here, compliance will take place because of self-interest, not because of the moral transformation of a thief. He is going to cheat less because it will be profitable for him to not cheat. But the interesting thing is, he will show transactions just enough to avail the credit, the real benefit is going to come on the direct tax side. GST revenues on the trading side may not show a dramatic increase, but on the direct tax side, there’s going to be a dramatic increase. This will be facilitated through the GSTIN number. After implementation of GST, nobody will be able to carry out any business in India without a GSTIN number, which is a 15-digit code, the first two digits of which are state numbers, and the next 10 digits are income tax PAN. By incorporating PAN in the GSTIN number, the indirect tax and direct tax databases are linked.
Read: Meaning GSTIN: PAN-based ID to simplify process, boost collections of indirect tax. Click here
How prepared is the government to implement GST?
For the first time in the history of this country, the government is better prepared than industry. Industry always thought GST would not pass in Rajya Sabha. GST is not just a tax reform, it is a transformational business process reform. All companies will have to change the way they do business. They have to integrate their taxation systems with their business processes. But the biggest challenge is technology. It is expected that there will be 80 lakh people registered under GST. And of course, the income tax registration is 540 lakh. Now out of these 80 lakh, 70 lakh would be small and medium businesses. For that the GSTN has created something called offline utility. You can directly send your details in Excel format to the utility, and GSTN captures it and converts it into the form. But the problem is, if you have made errors, it is very difficult to revise. So, filters will now be provided to remove errors.
People are very worried about giving invoice-wise details, but this problem is overstated. Invoice details are to be given only in B2B transactions. The interesting thing is GST will come on July 1 and, by July 10, you are expected to file details of your outward supplies; automatically, your inward supplies get auto populated because you are the buyer for someone as well. By July 15, you can see what has been populated as your inward supplies, and you can then accept some or not accept some. Where you don’t accept, you flag — and within two months, you have to reconcile; where you don’t reconcile, you cannot claim the credit. The person who takes credit of duty paid is made responsible for that person paying duty.
There is a system of compliance rating, so over a period of time, all suppliers will be rated on compliance. If somebody gets a rating of 3.5, why would you want to buy from them? What this is trying to do is discipline delinquent behaviour through a system of penalties and rewards, and this is going to pay very rich dividends. In a year’s time, I expect revenue to boom because the scale of cheating in India is so huge, especially in the wealthiest parts of the country. GST will probably do what demonetisation couldn’t do to that extent. It will ensure formalisation of the informal sector in a much more effective way.