Exposing faultlines in the GST regime

Prime Minister Narendra Modi in his inaugural speech at midnight of June 30, referred to the Goods and Services Tax (GST) as a life changing instrument for the poor. The implementation of GST has the potential to transform India’s economy, as for many years, we had a horrendous system of multiple indirect taxes like excise duty, customs, sales tax etc. The inherent idea of “One Nation, One Tax” is the essence of the new regime and is a popular model across the world, but the very idea has been diluted to “One Nation, Multiple Slabs of Taxes.”

In 2009, the 13th Finance Commission had strongly recommended for a single tax regime of 12% but the same has been conveniently ignored by the Expert Committee on the Revenue Neutral Rate for GST in 2015 which later got settled in four rate slabs.

At present, the Centre collects 62% of the total tax revenue, but with the onset of the new regime, the taxing muscle of the centre with respect to indirect taxes has been expanded to 83% of the overall tax revenues, leaving the states’ treasury high and dry. Thus, the GST regime is hijacking states’ taxing power. Similarly, the GST Council is more union centric and would regularly interfere with the financial sovereignty of the states which is against the spirit of fiscal federalism.

Experts believe that the existence of the 12% and 18% tax brackets – and their interactions with the 5% and 28% bracket — is an outcome of political arbitrariness and industry lobbying. Moreover, taxing several items, including some commonly used goods, at a steep 28% rate is quite alarming and defies any logic or common sense. India has attained the notoriety of highest GST rate imposing nation among the GST adoptees.

The new regime was supposed to mean lower taxes, instead, it is riddled with the irrationality of high rates. Nearly 60% of all goods under GST is being taxed at either 18% or 28%, of which 20% of all goods are in the 28% rate bracket, which ideally could have been kept only for certain classic luxury items.

Economists often wonder, under what economic rationale does the GST’s fitment committee justify keeping cashews and raisins at 5% but almonds and other nuts at 12%? Similarly, a 12% tax on sanitary napkins has been imposed under the new GST regime, which was criticised as gender insensitive.

Citizens are inherently honest tax payers but the government should be more sensitive for a fair taxation regime which is less pinching. High taxation rate like 28% is prone to rampant evasion. Why couldn’t we have a flat 12% GST, shared equally by the Centre and states? Such a tax rate would have given a major boost to the economy. It could encourage consumption and tame inflation by lowering tax on many essential items.

It’s bizarre that while cement, iron, bri­cks and work contracts are under GST, once flats constructed using these items are ready for sale, GST will not be levied on them. The nation missed an excellent opportunity to take on the rampant flow of black money trailed through real esta­te and alcohol. The government’s sweetener for the states is equally a non-starter, likely to pose another big challenge.

With so much social and economic diversities, the GST is bound to invite a barra-
ge of complexities in compliance. The traders in small towns will have a technological nightmare as Internet penetration with continuous power supply is poor.

What was the hurry?
Lack of preparedness of the IT infrastructure before the rollout of the GST has created a chaotic situation. Further, the insane paperwork and regulatory compliances cost will sharply increase and there is no substitute for this The economists and experts often wonder as to what was the tearing hurry in launching a massive reform without adequate preparedness.

Setting up of an anti-profiteering authority by law or designate an existing authority to carry out the functions is another thorny issue at present. The idea of government monitoring and controlling prices of all goods and services is anathema to a perfectly competitive market.
Issues like keeping liquor, electricity and petroleum (till notified) outside the purview of GST is illogical when it is considered to be all encompassing. Though global oil prices have steadily declined over the last six years, the NDA government has increased excise duties by over 150% over the last three years.

The industrial sector, especially the services sector, is waiting for more clarity on tax rates. A more complicated GST is likely to yield less favourable returns. A recent analysis by HSBC shows that the rollout of GST is likely to add only 0.4% to the GDP as against the 2% growth projected by Finance Minister Arun Jaitley.

The other crucial aspect is that while the exemption threshold is now Rs 20 lakh, for many small manufacturers it used to be Rs 1.5 crore, which means that thousands of hitherto informal or unorganised MSMEs will either shut shop or come under the tax net. Many experts opine that the current four rate structure will spark a flood of litigation on everything from which tax brackets companies fall into to the revenue they generated.

Though the big businesses are largely satisfied with the new system, the small businesses are afraid of it being another nightmare like demonetisation. The genuine concerns of India’s 6 crore small traders and businesses cannot be overlooked.

It was imperative that sufficient time should have been given to build up the infrastructure, the process of treatment of rates for different goods and a massive generation of awareness among the small and medium traders.

Despite so many drawbacks in the implementation of GST, the journey has now begun which is likely to be rocky for some time, but expectations are high for the future.

(The writer is a Supreme Court advocate)