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

For all the latest India News, download Indian Express App now

  1. A
    Akshaya
    Jan 5, 2016 at 8:40 am
    the article starts with LALIT MODI ,shouldn't it be Narendra modi
    Reply
    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
      1. T
        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.
        Reply
        1. A
          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.
          Reply
          1. A
            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.
            Reply
            1. A
              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.
              Reply
              1. M
                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.
                Reply
                1. M
                  murty
                  Sep 20, 2015 at 1:48 am
                  Is This writer sleeping for so many years??? or IE is woken up now????
                  Reply
                  1. N
                    Narendra M
                    Sep 19, 2015 at 4:11 pm
                    (1) This is a good article which provides the other side of GST. (2) It is futile to blame Lalit Modi controversy for delay in page of Goods & Service Tax (GST) legislation. Let us not forget that when UPA government was in power, BJP did not show same kind of enthusiasm about GST which it is now showing. Congress, having lost power, wants to use every opportunity to embarr the NDA government and hence there is little hope of introduction of GST regime within next two years, even by 1st April, 2017. (3) Let us not forget that when Shri Pranab Mukherjee was Union Finance minister, he wanted GST to be in pace latest by 1st April, 2016. For this purpose he had appointed a an Empowered Committee of State Finance Ministers to look into all GST issues related to State governments. I believe that report of this Committee should be mad e public. (4) If it is possible for the Union government and Finance Commission which is already holding discussions on many fiscal issues, to insist that certain benefits will accrue to the State governments only if the State governments agree to prune the list of GST exclusions, it may be feasible to find a way out for a sound GST legislation.
                    Reply
                    1. P
                      P.R.Joshi
                      Sep 19, 2015 at 9:28 am
                      The article makes a lot of sense, indeed. As rightly noted, an inadevertant breather is welcome, to debate and remove oddities.
                      Reply
                      1. R
                        Rahul Unnikrishnan
                        Sep 24, 2015 at 9:44 pm
                        Why are the comments not moderated? Healthy criticism is welcome. The authors are famous tax lawyers of India. I'm sure they understand the problems of GST better than a lay person. Point out the mistakes in this article- I mean, counter the points they have made by arguments which makes legal and administrative sense. That's healthy debate. Not calling them 'criminals'.
                        Reply
                        1. R
                          Rajgopal
                          Sep 19, 2015 at 6:38 pm
                          It is a little strange that these views are being put forth now, when the GST has been in discussion for a few years now ! As for complexities etc., are Excise, Service Tax and various state VAT laws, any less complex? If GST can do what VAT has done even to a fair extent, it is more than welcome. It is for the authorities to work on the methodologies, forms etc. in any case.
                          Reply
                          1. R
                            Ravindra Sharma
                            Sep 19, 2015 at 1:37 pm
                            G S T is economics but this article is politics , nothing substantial written about economics .
                            Reply
                            1. R
                              Rishi
                              Sep 19, 2015 at 11:08 pm
                              Countries all over the world have GST tax, so this is not an "out-of-the-box" reform legislation by Congress or NDA. The writers are not economists, but lawyers, so I would have little credibility in them on an important economic measure. I would rather listen to the likes of World Bank and IMF, who have strongly endorsed the planned GST in India. I would want to know the hidden motivations of the writers in pushing their anti-GST arguments.
                              Reply
                              1. S
                                Satish Kapoor
                                Sep 19, 2015 at 2:01 pm
                                The defects pointed out by the writers are pertaining to implementation problems and potential litigations. They have missed on basic defect that all indirect taxes are regressive; heavier on poor. Every Government claim to favour poor and dole out product based leaky and corruptive subsidies, which only benefit middle and upper cl. Products are used by all cles. Product prices inflated by indirect taxes make many products out of reach of lower income segment. Thus, taxes and subsidies promote widening the gap between poor and rich. Rightly pointed by writers that multiple exemptions and rate would increase complexity of system. As pointed out by Bibek Debroy – Indian Express Sep 17, 2015 – the more numerous the laws, the more corrupt the state; the writers have also mentioned – 16 per cent the, lowest possible rate, is bound to result in largescale tax evasion at the retail level. All government are promoting black marketing and corruption by increasing their dependence of Indirect taxes – just due to an illusion that they are easier to implement. Writers have suggested better alternative – work towards a unified Central levy. I fact Government can easily implement unified Central progressive levy based on personal expenses and cash support in consideration of individual requirement of poor to develop skills for productive jobs – hungry for skilled people. It will work dual purpose of reduction of inequality and acceleration of growth. Visit my post on google.
                                Reply
                                1. S
                                  SP
                                  Sep 19, 2015 at 7:03 pm
                                  I agree with the author. In many cases we blindly follow other countries without understanding what we really need. We would like nation to be a single market in the sense that trucks are not held up at inter-state boundaries. The compliance at the point of is very doubtful. Many cases the shops discourage you from paying tax, lest they have to pay income tax. We need to find simpler solutions like above. Rangrajan also has come up with alternative. Basically half-measures and political consensus do not take us anywhere. The point is will things work on the ground. Land Legislation turned out to be impractical. Food security too expensive and not targeted properly. FDI is defence at 49% is too less to swing matters in a big way.We need simpler, bolder and more effective reforms/
                                  Reply
                                  1. S
                                    SP
                                    Sep 19, 2015 at 7:07 pm
                                    The take-away from this article is that GST as a concept may be good. We still have many loose ends and no clarity on how exactly it will play on the ground. If it still leads to plethora of taxes, then at least we need a road-map to stream-line the taxes.
                                    Reply
                                    1. U
                                      Uttrakhandi
                                      Sep 19, 2015 at 4:24 pm
                                      The article clearly reflects that economics is not lawyer's forte. Implementation issues may have to be addressed but that does not make a sound concept defective, if you know your economics.
                                      Reply
                                      1. V
                                        Viswanathan NS
                                        Sep 19, 2015 at 6:33 am
                                        All the concerns raised in the article have been debated and a consensus has emerged. If the rate comes to even 20 percent it would be a great relief to vent today for goods which a common man buys the combined vat plus ed is 27 % so a very unfounded concern. The back of the envelop calculation is the combined gst can be 16percent if implemented.
                                        Reply
                                        1. V
                                          vinci
                                          Sep 20, 2015 at 3:40 am
                                          Only the writers like this animal is deadly to the nation. These corrupt media, corrupt congress and like fraud outfits and corrupt columnists this man are so deadly to this nation. These deadly and unpatriotic people support terrorists and eventually make the people lazy, unproductive and instigate non-nationals.
                                          Reply
                                          1. I
                                            Indian
                                            Sep 19, 2015 at 7:56 am
                                            Indian Govt collects TAX from Indians to buy Plane, tank, missiles etc and then give to DOWN in DUMPS state like Mizoram, Nagaland, Manipur, Bihar,J&K etc. .................. 50 percent of all taxes collected from every state- VAT, Service Tax, Income Tax, Exercise Duty, Customs duty goods sold in the state etc should be given to respective state and balance only retained by central govt to do what ever they want.
                                            Reply
                                            1. Load More Comments