Nothing is more exhilarating than the promise of change, especially if it will be a change for the better. When it was first announced, the Goods and Services Tax held that promise. It still could be a harbinger of a change for the better but, on a consideration of all the aspects, it seems to me the GST that came into effect yesterday is an imperfect tax that will usher in a long period of turbulence.
As an idea, GST is unexceptionable. The Constitution of India (Art 301) promised a common market for India. However, the tax systems of our governments ensured that the country remained divided and fragmented. Inter-state barriers were erected, taxes were collected and evaded, rent-seeking flourished, and trade and commerce suffered.
VAT and GST are major reforms
The Value Added Tax was the first comprehensive measure to bring uniformity in the tax systems of the states, but it was a state-level reform. Central tax laws (excise and service tax) and the principal state tax law (VAT) remained apart. Together, they imposed a heavy tax burden upon businesses, apart from the huge cost of complying with multiple taxes.
Once VAT was implemented throughout the country, the next logical step was GST. I seized the opportunity in 2006 to announce that it was our goal to implement GST by 2010. Delayed by seven years (does the Finance Minister remember who delayed it?), GST came into effect yesterday. I welcome GST but I wish that its launch was not surrounded by so many infirmities and uncertainties.
The positive aspects of GST need to be emphasised: One tax will subsume many taxes. It will capture nearly all commercial transactions above a certain threshold. It will eliminate cascading of the taxes levied at different stages of the value chain. It will enlarge the tax bases. Once these virtues were acknowledged by all states, every effort should have been made to forge agreement on the crucial aspects of GST. In the absence of such an agreement, and because of a forced compromise, we are starting with a very imperfect GST.
The Design Flaws
# GST should have been one standard tax rate (with a concessional rate and a demerit rate), but it is not. We have rates of 0, .25, 3, 5, 12, 18, 28 and many higher rates depending upon the cesses that may be imposed on so-called sin goods.
# GST should have been under one unified tax authority, but it is not. There will be a diarchy. States and the Centre will divide the tax bases into 90:10 (for turnover under Rs 15 million) and 50:50 (for turnover over Rs 15 million). I suppose a lottery will decide whether one’s tax authority will be the state government or the Central government!
# GST should have stipulated fewer returns, but it does not. By the most charitable count, a business must file three returns a month and an annual return (total 37). If the business is a multi-state business, and the tax authority is the state government, that number must be multiplied by the number of states in which the business is located.
# GST should have eliminated classification disputes, but it does not. Fitment rates were changed many times. We saw interest group advocacy in full play. There will be disputes. Mr Veerappa Moily asked, ‘Is KitKat chocolate or biscuit?’, because chocolates and biscuits suffer different rates. I suppose the Supreme Court will be requested to answer such questions in due course!
# GST should have reduced the discretion of the tax administrator, but it does not. On the contrary, draconian powers have been conferred on the ‘Anti-profiteering Authority’. Whoever conceived of the bizarre idea has no knowledge of economics or business or markets or competition. A century of experience on economic regulation has passed him/her by. He/she is a holdover from a dirigiste regime that believed that the government knows best and it is the government’s right and duty to tell business what it should sell and at what price.
Trial run would have helped
GST should have been given a trial run of two months before it was finally rolled out, but it was not. Every tax official who will administer GST at the state or central level should have been directed to spend two weeks working in the office of a small or medium business and actually ‘filing’ mock returns and ‘paying’ the calculated tax. During the trial period, the GST Network (GSTN) should have been tested in actual conditions and the glitches, if any, removed. The trial run would have boosted the confidence of businesses that they would be able to cope with the new regime. Of course that would have meant a short deferment of the final rollout of GST, but a stubborn government refused to pay heed to well-intentioned advice from many quarters.
The worst tendencies of the Indian State and politics and business have found their way into the design of the GST that was launched yesterday. Many of the flaws in the design were the result of forced political compromise. It seems to me too much has been compromised and for reasons that are not apparent. Anyway, we have a baby. It is not a bonny baby, it has some birth defects, it must be carefully nurtured, but it is our baby and let me therefore welcome the new baby.