Saturday 22 July 2017 News Updated at 12:07 AM IST
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How 'Good and Simple' is the GST really? - Deccan Herald
How 'Good and Simple' is the GST really?
K N Ninan,
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Image for representation.
At the stroke of the midnight hour on June 30 India ushered in the Goods and Services Tax (GST), which came into force with effect from July 1, 2017. Speaking at the special function held in the central hall of parliament, attended by the President of India and other dignitaries, Prime Minister Narendra Modi stated that ushering in of the GST marked a milestone whereby the country was transitioning into "one nation, one market and one tax”. He further argued that GST was "good and simple”, and will help accelerate economic growth, incomes and employment. While few would dispute about the GST being good, given that it has been implemented by over 140 countries around the world, there are serious doubts about it being simple as implemented in India, and its impact on economic growth, income and employment. The present GST regime may even aggravate inflation to the detriment of the poor and vulnerable sections including the farming community.

The GST implemented in the country stipulates the levy of five GST rates namely at 0%, 5%, 12%, 18% and 28%. However effectively, there are more than five GST rates for different commodities in the country. For instance, certain items, such as small, medium and luxury cars, which are in the highest GST tax bracket of 28% will also attract an additional cesses ranging from 1 to 15%. Added to that a window has also been left open for states to levy additional taxes, which was the reason why the film industry in Tamil Nadu went on an agitation to protest the proposal to levy local or entertainment taxes on films in the state.

Some critique

Critics such as Bibrek Debroy, Member of the Niti Aayog have pointed out that the GST regime implemented in India is not the ideal regime recommended by the 13th Finance Commission based on the NCAER model. Professor M Govinda Rao, a leading public finance expert and former member of the 14th Finance Commission notes that multiple rates rob GST of lower administrative, compliance and distortion costs.

The public has always been told that multiple income tax rates encourage tax evasion and lead to higher administrative and compliance costs, which was the justification used to lower and reduce income tax rates and categories in successive budgets presented by our Finance Ministers. This being so, one doesn’t understand the logic and justification for going in for a GST regime with multiple tax rates, which will also result in lobbying and rent seeking. Further, the 28% GST rate implemented in the country is the highest among all countries in the world. In the UK, it is around 20%, Australia 10% and in Singapore about 7%. Whether a poorly designed GST regime is preferable to a no-GST regime is debateable.

The GST regime is not simple and quite confusing in many respects to businesses and the public. Take the case of mobile phones, where the handset is taxed at 12%, earphones at 18% and the charger at 28% under the GST. In the case of rolling shutters, where the handle will attract GST of 18% and the inbuilt lock at 12%. Similarly, while personal computers and printers will be charged GST at 18%, monitors and projectors attract GST of 28%.

Or if you eat in a restaurant, which has an AC section and another section without AC, how will be GST be charged? Alternatively, if a consumer purchases items at a super market or provision store and purchases commodities that attract 0% and 12% or 15% GST, how will this be demarcated and reflected in the bill? Ideally, the bills issued to purchasers should demarcate between these two sets of commodities and charge GST on the items which attract GST. This gives ample scope for traders and hoteliers to cheat consumers.

As to its potential impact on economic growth, employment and inflation one needs to see how it will be positive. While the government claims that it will help accelerate economic growth and lead to a 1-2% rise in GDP, others dispute this. However, some sections are surely going to benefit, especially auditors, chartered accountants with their businesses and clients increasing, and also lawyers in view of legal disputes arising due to the GST regime with multiple rates and complicated structure. Furthermore, even though daily items such as vegetables are exempted from the GST, traders have taken advantage and levying higher prices on these commodities sold under the excuse of GST or rise in input and business costs.

Improving the 'ease of doing business’ has always been emphasised by successive governments to attract foreign investors. The government has also cited the World Bank to buttress its claims that India has moved up the ladder among countries in the world in the index on ease of doing business. But improving the ease of doing business should not only be targeted at foreign investors but also for domestic businesses. Some of the provisions of the GST regime bely this. The need for filling three forms per month (or about 36 forms per year) by businesses, stipulations for e-filing for movement of goods worth over Rs. 50,000 even within states, requirement for ecommerce portals to deduct tax at source from sellers, apart from the multiple GST rates and complicated structure, etc. will aggravate the ease of doing business for both domestic and foreign businesses.

(The author is Chairperson, Centre for Economics, Environment and Society, Bengaluru)