Conceptually,the Goods and Services Tax (GST) model proposed by the 13th Finance Commission has the potential to catapult India to the ranks of developed nations that have the most modern and transparent taxation systems. Politically,however,the new GST recommendations will be vehemently opposed by powerful political and business interests that have a stake in persisting with Indias opaque tax system which feeds the growing black economy which many suspect could be over 40 per cent of Indias official GDP.
In fact,the new tax system seeks to strike at the very root of the nexus between Indias politics and business by bringing many holy cows into the indirect tax net. This will enable the government to capture large parts of business activities which are currently left out of the indirect tax net. And a substantially higher volume of business activity being brought under the value added tax net will enable the Centre and states to charge a relatively much lower combined GST of 12 per cent. Mind you,the current total incidence of indirect tax levy by the Centre and states is about 24 per cent.
So the new landmark proposals seek to virtually halve the incidence of indirect tax imposed by the Centre and states. There cant be a bigger fiscal stimulus than this. Even for the consumers,this will come as a big relief as the cost of many goods and services,which go up because of the multiple and cascading state taxes that exist today,will go down.
Remember,as per the present model,even petroleum products will be part of the GST. The Left parties and others across the political spectrum have argued that consumers have to bear an extra 40 per cent cost on diesel,petrol,etc purely because of indirect taxes. The proposed GST of 12 per cent would cut that by more than half! There are upsides for consumers and farmers,for the GST does not exempt any sector except unprocessed food,school and college education and health services.
On a net basis,the economy as a whole will be a big gainer. Remember Australia introduced the GST in 2000 and succeeded in knocking off over $16 billion of extra costs incurred by domestic output and exports. Everyone benefited,though there were initial fears raised by a minority among businesses who felt they would be hurt.
The politics of the GST is very interesting. It seeks to benefit the larger masses but sharply targets strong vested interests in politics and business that feed on the black economy. The biggest opposition will come from the informal real estate developers,many of whom front for politicians. The other sectors where politicians have an interest in maintaining the status quo are tobacco and liquor. Much of the liquor industry thrives outside the state excise framework. The country liquor and beedi industries,largely dominated by politicos,will be captured under the proposed GST.
Over the last 15 years India has seen the emergence of a wealthy real estate bourgeoisie as land prices in hundreds of smaller cities have gone up by leaps and bounds. Much of that black economy feeds the political parties during elections. The proposed GST seeks to tax at 12 per cent every stage of the real estate development,starting from buying of land by the developer and ending with the developer selling the property to the final buyer. Taxing just the value added portion at 12 per cent at every stage of real estate development will reduce the overall cascading taxes that currently fall as a burden on the end buyer. It will also create greater transparency as those taking input credit will be forced to invoice correctly.
The current practice of under-invoicing property will be discouraged under the proposed GST system. The GST will subsume the stamp duty levied by states in a phased manner. The states earn close to Rs 40,000 crore from stamp duty annually. Clearly this is the most lucrative source of revenue for the states. The Centre will have to do a grand bargain with the states and reassure them that revenue losses in the medium term will be made up through special transfers.
The states should also realise if they earn Rs 40,000 crore annually from stamp duty at present,it is not inconceivable that they will earn more than double that amount if a transparent GST brings all real estate transactions into the official economy. Of course,the vested interests who would get hurt in the short run will not buy into this larger vision. It will be interesting to see how the collective leadership of the United Progressive Alliance will respond to the proposed GST.
It is likely that some of the coalition partners who control the real estate activity in states may oppose the idea in the name of states losing revenues or the spirit of federalism being undermined by the Centre. These tactics will be used by those who may not want transparency in the tax system.
Politically,the tragedy is that the larger masses who benefit from a transparent tax system are scattered and do not make a noise. The noise level of vested interests often drowns out the silent majority. This has been the experience even with the proposed Direct Tax Code which is being vehemently opposed by sections of businesses who feel they will be hurt by provisions such as Minimum Alternate Tax (MAT) on gross assets or the 15 per cent tax on Trusts run by corporate houses.
Even here,the fact that the vast majority over 96 per cent of individual tax payers,who will come under the 10 per cent tax bracket (the lowest in the world),is pretty much going unnoticed and unsung. However,the politician must remember that this silent majority does vote every five years. There is an urgent need to separate facts from all the noise that a minority can generate in our fractious democracy.
The writer is Managing Editor,The Financial Express