Tax, in the bigger picture
GST avoids the challenge of shifting to a higher proportion of direct taxes
GST avoids the challenge of shifting to a higher proportion of direct taxes (PTI)
Understanding is not merely a product of objective analysis. It needs a perspective as well. The national debate on GST is a case in point. GST can not be admired and criticised merely based on Rs 10 or Rs15 toothpaste and shampoo. It has to be weighed upon a broader taxation policy perspective. The question at stake is the viability of taxation policy as a whole, which is a reflection of economic policy, and, in turn, the approach towards its duties by the state itself.
India’s tax-GDP ratio is 18 per cent which compares miserably when with developed countries (between 30 per cent and 40 per cent) as well as comparable economies such as Mexico, Brazil, and South Africa (between 23 per cent and 26 per cent). India, on the launch pad of development, has to attain a thrust by improving upon this figure to reach a target of 25 per cent.
Second, of the total taxes collected in India, almost two-thirds come from indirect taxes while taxes on income and profits contribute only a one-third share. This is exactly in the opposite proportion when compared to other nations. In terms of healthy economic development as well as social policy objectives, such a low base of direct taxes and a high proportion of indirect taxes is the recipe for an adverse future. It is with this perspective on taxation policy, that we must assess GST.
First, some positives of GST regime. Under reporting of turnover and evasion of taxes on goods and services is the first step towards evasion of taxes on profits and income. With a greater convergence of direct and indirect tax departments and also due to the creation non-erasable automated electronic trails by GST, it will not be easy for the business class to default on direct taxes. With GST, there will be a tremendous pull and push to be a registered and tax compliant business unit rather than remain an unregistered seller due to the peculiar system of tax input credit.
However, in spite of the great potential, the decisions with regard to tax rates and the exclusions made by the GST council are, thus far, disappointing than promising. Although it appears that India’s GST rate is broken down into four rates — 5, 12, 18, and 28 per cent — the reality shows that at least seven rates would be in operation. This will not only defy the basic winning point of GST — “one nation one tax” — but also increase the possibility of corruption and falsification due to a multiple-slab, loophole-prone tax system. Surprisingly, some glaring absurdities are seen in the classification of items. Gold, which as a fully imported item creates nothing but current account deficits and acts as a frequent destination for black money, has been allotted only 3 per cent GST and diamonds, 0.25 per cent. Meanwhile, essentials like sanitary napkins and medicines are to attract 5, 12 or 18 per cent GST.
Certain items such as petroleum, electricity and taxes on liquor — which constitute a major chunk of states’ income — are kept away from the purview of the almighty GST. It should be noted that the taxes on refined petroleum products in the country constitute about 40 per cent (diesel) to 56 per cent (petrol) of their retail prices. In the last three years in particular, there has been a rise of 122 per cent in the indirect tax collection from the petroleum sector. The exclusion of the petroleum sector from GST is not only travesty of justice, it also indicates the intention of the government to cling to its reliance on indirect taxes as the principal source of taxation rather than shifting to direct taxes.
In Malaysia, more than a year was given to industry to prepare for the tax change. New Zealand gave about two years. With GST, the fear is that a lack of preparedness may lead to near-term disruption for businesses and unnecessary chaos, as a large number of mid-size cities in India lack reliable internet access. Overall, internet penetration in India is at merely 32.8 per cent, out of which only 15.4 per cent is the rural population. Due to lack of infrastructural preparedness, there could be a temporary obstruction in small and medium businesses.
From a deeper exploration, it is clear that taxation, rather than just being an issue of ascertaining the exact liability of tax and its enforcement, is also a matter of discovery and voluntary disclosure. For various cultural as well as social-historical reasons, the tax psychology in India is of avoidance rather than compliance. GST uses a unique modified deterrent behavioural model, wherein it promotes tax compliance behaviour as a compulsion along with a self-profiting motive. However, to shift from non-compliance to compliance we need a paradigm shift in culture, which is completely overlooked in any discussion on GST. It is necessary to make India embrace a tax compliant business and social model which would make tax evasion a social offence and a matter of shame rather than a badge of smartness. The awareness of this gigantic task is not seen anywhere in the political race for credit, led by the ruling party.
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