Economic
Highlights
New Delhi,
1 May 2015
Centralised
GST
INFLATIONARY,
AGAINST STATES?
By
Shivaji Sarkar
The
proposed Goods and Services Tax (GST) is a complex law. It empowers the
bureaucracy more, increases costs and the supposed benefits to industry or the
people are illusive. As drafted it looks more like a document wrapped in red
tape. The political intent is good but it is likely to get lost in bureaucratic
quagmire. People of India
may have a harrowing time once such a law is enacted.
The
expectation that it would bring down the tax rates and make goods and services
cheaper may also get belied. It may be more inflationary than the present tax
regime. When sales tax was replaced by VAT a similar argument of reduction in
taxes was given. The VAT, in effect, increased the tax manifold.
The
GST would be applicable on supply of goods or services as against the present
concept of tax on the manufacture or on sale of goods or on provision of
services. It is destination-based tax against the present on the origin of
goods. It plans to tax every untaxed item though conceptually GST subsumes
various Central indirect taxes including the Central excise duty,
countervailing duty, service tax and State value added tax, octroi and entry
tax, luxury tax. But it leaves liquor for human consumption, petroleum products
and the Centre reserves the right to levy any additional tax above the agreed
rates.
Some
richer States such as Gujarat and Maharashtra
want the powers to levy additional taxes exemplifying the discontent. Smaller
states are not satisfied at the compensation. They want more. The Centre
ultimately would be buying more problems instead of simplifying the system.
As
per the Central Board of Excise and Customs (CBEC), the agency that would be
administering the GST, the present combined indirect tax rates are around 25 to
30 per cent. It is a guess and not an exact assessment. The new “combined” tax
rates are not known – the Bill is silent on this aspect. It has been left to
the proposed GST council. But the departmental sources indicate that the GST
would not be less than 26 per cent, considered high even by those who were
instrumental in drafting the law. It is not the end. The Centre has reserved
powers to levy an additional one per cent tax on inter-State movement of
goods. The rationale is not clear. The trade body ASSOCHAM has made its
opposition known.
The
Bill thus is likely to include many more goods and services to fulfil the
unsatiated demand of the State to have more revenue and a slimy bureaucratic
glee is visible. The natural corollary would be an increase in prices of goods
and services. There may be a chaotic market situation. The chaos is not
restricted to the concept of the common law. It proposes to tax almost every
destination-based sales and that is likely to affect even the farm goods, food
grains, handicraft, even local market –haat- in a massive way. It is
also not clear how the destination would be defined or decided.
It
is also apparently a myth that the taxation procedure would be simplified. The
GST itself is not one tax. It is a combination of three taxes – Central GST,
State GST and integrated GST for inter-State dealings. In reality, it is having
multiple taxes as it is now but the right of collection is to be vested with the
Centre. The States would be reduced to dependencies.
Will
it reduce disputes? The CBEC envisages that accounts would have “to be settled
between the States periodically”. Since there are 29 States and seven Union Territories
this would be an enormous continuing procedure. In short, it would be an
endless Centre-State dispute. The States possibly rightly have reservations
over GST. It is likely to add to the cost of tax administration as well and
that burden would ultimately be passed on to the people. This apart, the CBEC
estimates that it would have to increase its staff manifold.
The
bureaucrats are likely to have more discretionary powers as disputes are likely
to increase as per a CBEC paper. That is where the bureaucrats trade the most.
It is no secret how honest the officials in the Income Tax and related revenue
departments are. And this may open up avenues for harassing petty businessmen
across the country. Big businesses see it as simplification of their procedures
as they hope it would be virtually a one-window tax payment system. In reality,
it may not be so.
The
CBEC says that there are surfeit of laws, regulations and procedures for levy
and collection of CGST and SGST. It is difficult to harmonize these. On
December 22, last year, the parliamentary consultative committee demanded
publishing of a consultation paper before the GST is rolled out to clarify
various issues.
Often
GST of Canada
levied at 5 per cent and Asia-Pacific region having 10.88 per cent are
cited as instances of ease of business. But the European Union countries,
according to KPMG, have the highest GST or value added tax (VAT) -- of around
19.5 per cent. Latin America has 14.2 per cent
and OECD countries 17.7 per cent. The world’s highest indirect taxes are found
in Sweden, Norway and Denmark. The US does not
have a GST.
The
trade body, Federation of Indian Chambers of Commerce and Industry (FICCI)
emphasises on clear classification of goods and services, meaning presently
they are vague in many cases, and one simple rate – suggesting that the 1122nd
Constitution Amendment Bill has ambiguity in these areas.
It
is true that States have varied tax laws. They also have varied topographical,
cultural and business peculiarities. The centralized tax proposes to ignore
these special needs of the States. It wants to subsume diversity in a
centralized structure. At the same time, it may benefit some richer States but
may end up harming remote north-eastern and other backward States.
The
GST process has also not taken into account the redundancies it would create
among tax-collecting staff in States. Should they be sacked? Further, it has
also not assessed the additional cost on the Centre, which would be two-fold –
on larger administrative infrastructure and the need to appoint additional
staff. The CBEC admits so, but has not made any assessment of the additional
expenditure. On a rough but conservative estimate, the Centre may have to bear
at least an additional cost of Rs 1 lakh crore. Is GST then really a viable
solution?
India needs
simplification of its taxes. It should better be worked out between both the
Centre and the States through negotiations. It goes without saying that it
requires a decentralized solution not a monolithic structure. ---INFA
(Copyright, India
News and Feature Alliance)
|