GST’s seven deadly defects

Government should abandon it, work towards a unified Central levy instead.

Written by ARVIND P. DATAR , K Vaitheeswaran | Updated: September 19, 2015 12:13 am
Goods and services tax, GST, GST bill, GST draft bill, Winter session, NDA government, arun Jaitley, narendra modi, Congress, india news, latest news, indian express columns Industry and large sections of the media have been seduced into believing that the GST will alter the economic landscape of India and usher in a benign, assessee-friendly tax regime. (Source: Reuters file photo)

Lalit Modi effectively but unintentionally torpedoed the GST bill. In a shocking display of warped priorities, a debate on the biggest change in indirect taxes was sacrificed at the altar of petty politics. Now, with the Congress still unrelenting, the government has dropped the plan to convene a special session of Parliament for passing the GST bill. If there is another scam before the next session, we can say goodbye to any meaningful legislative business being conducted. But this interlude should give the nation time to rethink whether the headlong pursuit of a complex and mangled GST is really in India’s interest. Can we afford such a cataclysmic change at a time when there is a critical decline in the manufacturing and services sectors?

Industry and large sections of the media have been seduced into believing that the GST will alter the economic landscape of India and usher in a benign, assessee-friendly tax regime. Indeed, in its traditional or classical form, a GST would have been enormously beneficial. But the Indian avatar, unfortunately, suffers from at least seven deadly defects.

First, one of the main benefits that the new GST regime promises is a reduction of multiple taxes. But the truth is just the opposite. Article 246A now confers power on Parliament and every state legislature to levy goods and service tax. Thus, we are likely to have one parliamentary law and about 28 state laws that levy GST. And there is no constitutional requirement that all the state laws be uniform. The GST Council can only “recommend” a model law but nothing prevents each state from going its own way. The VAT experience is testimony to this. Such multiple levies by Parliament and the states, if not in harmony, will have disastrous consequences.

Second, after nine years, the constitutional amendment to facilitate the GST is still pending. And this is just the beginning: the herculean task of drafting the Central GST, the state GSTs and the inter-state GST is yet to be completed. What will be the text of these laws and the procedural rules and forms? How are we going to merge the existing laws on excise duty, VAT and service tax together? And, most important, how are we going to grant seamless input credit? It is indeed unfortunate that the actual enactments and rules on the GST are still unknown; this is a dangerous area of darkness. Drafting these laws without consulting stakeholders will only compound the confusion.

Third, there is still uncertainty about the final GST rate or rates. While the states want a rate of 26 per cent, the Centre is seeking  a cap of 16-18 per cent. A GST levy of even 16 per cent is bound to result in largescale tax evasion at the retail level. It is going to be very difficult to expect a consumer to pay 26 or even 16 per cent on the purchase of a refrigerator costing Rs 50,000. There is also no clarity on the basic threshold exemption and the GST can easily be derailed by multiple rates and numerous exemptions/ concessions.

Fourth, the basic feature of any GST is a seamless system of taxation where all duties on all inputs (whether goods or services) are set off against the duties payable on the final product. While most countries have a single GST, few have a dual GST. The Indian version is likely to be the most complex, with different states enacting their own laws, thus

introducing the concept of “importing” and “exporting” states. The exclusion of petroleum products, electricity and real estate will result in a grotesque, mangled and mutilated Indian version of the GST. While there could be possible cost-savings for manufacturers due to a leaner supply chain and the elimination of cascading taxes, the impact on the service sector could be costly and inflationary.

Fifth, although several countries have a GST, it is completely unsuited to a vast, heterogeneous country like India. An essential feature of Indian federalism is that the Union and the states can levy different types of indirect taxes to suit their special requirements. Indeed, the needs of states like Maharashtra and Gujarat are completely different from states like Jharkhand and Assam. The GST is bound to lead to serious difficulties, and could possibly fail, because it seeks to treat unequal states equally. It will be practically impossible for the Centre to compensate states that are likely to lose tax revenue for the next several years.

Sixth, the GST is a merger of Central and state levies right now administered by Central and state government officials. How many assessees will we have state-wise? Who will administer a combined GST? Will each state insist on administering the GST within its territory? If so, there will be no role for the Central excise or service tax departments, except in inter-state transactions. Which are the appellate authorities? Will there be one tribunal or multiple tribunals?

Seventh, the proposed GST will make imports more competitive. The complex regulatory and tax laws and rampant corruption at each stage make manufacturing in India an activity only for the brave. If IGST on imports is available as a credit to a trader as against the existing system, which does not allow countervailing duty and special additional duty credits, imported goods will get a competitive advantage, seriously sabotaging the Make in India initiative.

The courageous course of action would be to abandon the proposed GST and work towards a unified Central levy. It is best that the taxing powers of the state are not curbed. Victor Hugo reminded us that you cannot stop an idea whose time has come. The tortuous history of the GST in India is a sign that the Indian model of this tax is an idea whose time should never come. We can ignore the clear writing on the wall at our own peril.

The writers are practising advocates of the Madras High Court and Supreme Court

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    Akshaya
    Jan 5, 2016 at 8:40 am
    the article starts with LALIT MODI ,shouldn't it be Narendra modi
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    1. S
      S
      Jul 17, 2016 at 1:09 pm
      on a term policy premium of Rs 15250, i am made to pay a tax of Rs 2520 or so.lt;br/gt;on my broadband bill of rs 4400 i am made to pay service tax of rs 521lt;br/gt;on my mobile bill of rs 1000 i will be paying rs 150 as tax-lt;br/gt;do all these taxes reach the GOI - why should be pay such high tax and spend rs 1000s of crores just for Z security for criminal politicians? lt;br/gt;if service tax is hiked to 18% or no limit is prescribed and if 26% ST is levied- MIddle cl will be CRUSHED?
      Reply
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        TIHAEwale
        Sep 19, 2015 at 8:44 am
        a well written article. rather taxes should be abolished. just see the nonsense where one pay 14% tax called service tax just to take a Life Insurance policy. it is seen honest tax payers will pay taxes all times and evaders don't pay any thing.
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          A Bhave
          Sep 19, 2015 at 6:21 pm
          The Eight deadly defect is that GST if implemented properly will put most tax lawyers out of business! It will do so by eliminating clification disputes and simplifying liability determination. However, one point made rings true- the government of india has not adequately allowed an open debate on GST proposals leading to confusion and apprehensions as seen here.
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            Anil Gupta
            Sep 20, 2015 at 8:11 pm
            None among our leaders or bureaucrats know about the actual benefits of GST. Just because Dr Manmohan Singh committed at WTO in 1995 to bring VAT or GST it became "most ideal" tax law that is being projected as a panacea for all the ills of our taxation system.But if it is "best" then why US has not adopted it or VAT? I think no original thinking has been done by our FMs or Secretaries or Tax Planners. Arthkranti, a Pune based research body has propsed abolition of 72 out of 73 taxes in India ( central, state and local). And instead levy a 2% levy on all transactions of deposit in banks.A high powered committee be consuted to study this original proposal.And if found suitable then switch over to it.
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              anandap
              Sep 19, 2015 at 12:42 pm
              Perfect analysis as for as India's fond for laws and regulations concerned for the sake of preventing transparency and accountability. Without repealing all other , custom and excise laws of state and central governments, how can implement a uniform GST. The author's concerns are genuine and when are they going to change Consution for this implementation. A herculean task if implemented with complex style of state intervention and imposition of other forms of taxes may follow up.
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                manoj
                Sep 19, 2015 at 6:59 pm
                With all due respect this man seems to be too negative. Points mentioned by him are too vague & he is just misguiding people or He might not have any idea about economics.
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                  Simply Goa
                  Jun 14, 2017 at 6:05 pm
                  Mention which points are 'too vague'. This is, by far, the more concise explanation I've read on GST.
                  Reply
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                    xx
                    Jun 29, 2017 at 11:50 am
                    your comment seems vague.
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                    murty
                    Sep 20, 2015 at 1:48 am
                    Is This writer sleeping for so many years??? or IE is woken up now????
                    Reply
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