In line with worldwide practices, the Goods and Services Tax (GST) rolled out nationwide on July 1, except Jammu and Kashmir, with the 101st Constitutional Amendment Act. GST is a multi-point tax on value added at each stage on the supply of goods and services from the manufacturer to the consumer. The final consumer only bears the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. It is a single indirect, destination-based, fully online tax, replacing 17 Central and State taxes, making India one unified common market.
According to economist Dr. Vijay Kelkar, “High import tariffs, excises and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports.”
India’s taxation system suffered from high costs of compliance, administration and litigation issues; poor competitiveness of goods due to cascading of taxes and incomplete input tax credit system; fragmented market and inefficient production/distribution models; protectionism of domestic industry; narrow tax base due to different thresholds, exemptions and concessions.
For instance, in the pre-GST regime, the overall tax rate stood 25-30% (12.5% central excise, service tax along with residual VAT of 12.5-14.5%). Post-GST, for a general rate of 18%, there will be a gain of 7-12%. Moreover, the indirect tax was more regressive in nature owing to the imbalance between direct and indirect tax. The poor and lower middle class tend to pay more indirect tax than the rich.
A 17-year Journey
The GST’s journey began during the NDA government in 2000 and it was first proposed at a meeting of then Prime Minister A B Vajpayee and his advisors, including former RBI governors IG Patel, Bimal Jalan and C Rangarajan. A committee headed by then West Bengal finance minister Asim Dasgupta, was set up to design a GST model, put in place back-end technology and logistics. In 2003, the Vajpayee government formed a task force under Kelkar to study it in-depth and recommend tax reforms.
The work on GST continued when UPA-1 took office in 2004. The following year, the Kelkar Committee on the suggestion of the 12th Finance Commission recommended rolling out the GST. Then finance minister P Chidambaram set April 1, 2010, as the deadline for introducing GST. In February 2010, the government launched ‘mission-mode’ computerisation of commercial taxes in States.
Subsequently, in 2010, the government tabled the Constitution Amendment Bill in the Lok Sabha for GST, which was sent to a Parliamentary Standing Committee headed by Yashwant Sinha.Meanwhile, Dasgupta resigned and was replaced by then Kerala Finance Minister K M Mani. Chidambaram set another deadline of December 31, 2012. But this too was not met. In 2013, the Parliamentary Standing Committee submitted its report and the GST Bill was ready for introduction in Parliament. Prime Minister Narendra Modi, who was then Chief Minister of Gujarat, opposed the Bill on the grounds that his State would lose Rs 14,000 crore every year due to GST.
Owing to such opposition and lack of clarity, the Bill lapsed. Thereafter, Finance Minister Arun Jaitley introduced the Bill in the Lok Sabha but this time the Congress objected. Jaitley set April 1, 2016, as the deadline but this too failed. After much squabbling, in August 2016, a consensus was reached and the Bill was passed, and 18 States ratified it in the next 20 days. President Pranab Mukherjee gave his consent and the GST Council to frame five GST Bills was set up in September. Jaitley set the rollout date as July 1, 2017.
Impact on Economy
Most economists forecast inflation to come down as most essential goods and services and household consumer items are exempt or charged very low rates. Further, as most services are not in the Consumer Price Index (CPI) basket, the GST implementation will have minimal impact on the CPI.
However, if, in the medium term, increased tax compliance leads to a higher tax burden, inflation may increase. Many small companies will come into the tax net, with a shift from unorganised to organised trade. Complete passing of the benefits of lower tax by firms to consumers is also doubtful. The immediate impact on the economic growth is uncertain. Analysts say growth may be disrupted as big companies reorganise businesses and small firms lose revenue.
Growth is likely to increase by 1-2% on account of ease of doing business, improved profitability and investment. Further, higher tax revenues are also expected to reduce the fiscal deficit of the government. According to the Reserve Bank of India, “based on information pertaining to 25 States, the consolidated gross fiscal deficit to gross state domestic product ratio is budgeted to moderate to 2.6% in 2017-2018.”
Chief statistician TCA Anant has called it an exciting development from the data point of view. After GST, the amount and nature of economic activity taking place can be determined almost real time and with accuracy. Moreover, GST could permit cross-auditing of returns with income and other taxes, thereby assisting in tax avoidance and evasion.
1. Loss of revenue and fiscal autonomy
GST is a destination-based tax whereas the earlier system was origin-based. Thus, key manufacturing States like Maharashtra, Gujarat, Tamil Nadu, Karnataka stand to lose and consuming States will gain. Similarly, loss of State taxes like Octroi will also impact their revenues. States had autonomy over levy of sales taxes, accounting for about 80% of the revenues.
With GST, this autonomy is gone. However, Finance Minister Jaitley clarified that the power to levy tax on services will make up for this shortfall.States, therefore, are looking at options to raise non-tax revenues and borrowings to fund capital investment, outgo on account of 7th pay panel and far loan waivers, among others. In the GST Council, States together have a weightage of two-thirds in any decision while the Centre alone retains the balance one-third. This is akin to giving the Centre veto power and experts opine that the Centre must not be given this power.
2. Infrastructure and Other Issues
West Bengal did not participate in the launch over infrastructural deficiencies in its implementation. In fact, Amit Mitra, Bengal Finance Minister and one of the architects of GST, said, “We have said this repeatedly that GST must be rolled out systematically with full preparation. But we are heading towards an impending catastrophe.” He has also questioned the arrest clause. Under the VAT regime to counter serious tax offences, officials were required to file an FIR and pursue the due process of law.
Under GST, inspectors have the power to arrest violators for offences. Bengal Chief Minister Mamata Banerjee said this clause could be used against businesses by the government.Critics also point out that a trial and error approach should not have been followed. Prior to the nationwide rollout, GST ought to have been implemented in a small area to get over these errors.Revenue Secretary Hasmukh Adhia, however, has assured that all will be fine. “Ordinary people need not worry. It is not at all complex and people need not worry. Eighty per cent of the businesses will have to just file total turnover,” Adhia said.
The GST Compensation Bill (Clause 19) provides a legal backing to the Centre’s promise to compensate the States if their revenue growth rate falls below 14% in the first five years of the rollout. The base year for calculating revenues is 2015-16.
To compensate the States, a yearly Rs 50,000 crore compensation fund is being set up by levying cess on demerit goods and luxury items.Revenue shortfall bridged would be 100% for three years and 75% and 50% in the fourth and fifth years. The surplus, if any, in the fund at the end of five years will be divided between Centre and States.Challenges A tax like GST has been implemented in over 150 countries but none meets the specifications for the model envisaged for India. The recent protests by traders in sectors such as textiles (Andhra Pradesh, Gujarat, Telangana), retail (Gujarat), road construction (Gujarat), furniture (Delhi) and diamonds (Gujarat) over the GST rates or requirements of rigorous record keeping are indicative of the complexities likely to be encountered while implementing a reform of this proportion.
There is also lack of clarity on transition provisions, modus operandi and implementation of anti-profiteering provision. It is, therefore, essential that there be effective coordination between Centre and State tax administrations.
The GST rate, four slabs now, should be made single or more convergent in the near future. Most products should fall within standard rate of 18%. Temptations of arbitrary rate fixation should be avoided and exemptions must be limited, experts said.The fear of inflation is also lurking, as was the case in other countries. However, Adhia has said that countries abroad had a single point tax and this led to inflation. GST is levied all along the value chain, which is similar to India’s earlier system, so the impact will be minimal.