Sunday, 7 August 2016

GST is great idea, but ...

GST is an important tax reform that simplifies the tax structure, increases tax compliance, reduces corruption, increases government revenue and integrates states eliminating borders within borders in the country and provide a common national market. Corporate sectors’ decisions to set up production operations would be influenced not by tax benefits but on core business efficiency. GST could result in an initial increased inflation during first year and growth kicks in second year on wards. Asymmetric pricing behavior by firms where tax increases may be quickly passed on to output prices, while refraining from passing-on tax savings to consumers. However, in the long term, lower tax and logistic costs, productivity gains and higher investments under the GST should structurally reduce inflation.
  1. GST is great idea and is hailed as “co-operative financial federalism", and “one nation, one tax, one market".
  2. Trucks in India average just 270km a day against 800km in the developed countries because of checkpost delays at state borders, and GST could slash these.
  3. Economic optimists hope GDP will improve by over Rs 100,000 crore.
  4. Simplicity and uniformity in taxation is indeed an excellent idea. But implementation across the nation is not going to that easy.
  5. For corporates, the biggest change after GST will be improving the ease of doing business.
  6. GST being a destination based consumption tax the revenue resulting from interstate transactions will accrue to the consuming state. Thus, the manufacturing states will be at a loss.
  7. GST does not provide for one tax rate across India. An ideal GST would have one tax rate for each item across all states.
  8. One expert committee suggested four tax bands - zero for essentials, 12% for merit items, 17-18% as the standard rate for other items, and 40% for luxuries. Besides, alcohol and petroleum products are outside GST, with each state free to set its rates.
  9. Many states will demand that the GST Council allow them to decree substantial additional levies or exemptions.
  10. Once GST comes into force, the Centre's rights to determine the rate of national taxes will cease to be absolute. The proposed GST Council, in which the states together have two-thirds voting rights, will now have a direct say in the rates of taxation. 
  11. Once rates are set, changing it will become a herculean task. From budgets 2018 onwards, the finance minister's focus would shift from muddling tax rates to increase tax compliance & recoveries and reduce government expenditure. Revenue generation stands outside government's control.
  12. Octroi checkposts in cities will disappear, a great boon. 
  13. Checkposts at state borders will remain, but their scope for mischief will be restricted by the abolition entry tax. The checkposts will be retained for checking vehicle registration, criminal activities, and other grounds, so harassment, delays and corruption may not disappear. But will fall substantially.
  14. States will constantly be tempted to gain short-term benefits by fiddling with tax rates, ignoring the damage this may do to the idea of one single market.
  15. The states are to be fully compensated for loss of revenue because of GST and disputes will certainly arise. New GST law provides for quick dispute settlement mechanism. Historical experience in dispute settlements in India reveals long delays.
  16. Tax officials are constantly at war with companies in the existing system, and tax litigation is rife. GST should reduce litigation and tax disputes. But during transition increased misunderstandings and differing interpretations will cause spurt in litigation and disputes. 
  17. If any state feels aggrieved to get other states and the Centre to see its point of view, it can do nothing immediately. The frustrations of impotence could drive their politics in the direction of irresponsible adventurism.
So, hold the euphoria. GST is a great idea, but many great ideas in the past have been damaged in implementation. Statesmanship and diligence will be needed to ensure that GST lives up to its high promise.

My View:
GST is no doubt a great idea not withstanding implementation difficulties during transition. The bigger problem is evasion of tax which is as high as 50%. My view is that GST for essential items should be 0%, for non luxury items 4% and for luxury items at 10%. Even petrol and alcohol should be brought under GST with special tax rates so that consumers will pay uniform and exact international market rates across all the states. Simplified and lowered tax rates are incentives for tax compliance. Penalties for evasion should be very high with high rate of convictions so that corruption and evasions are eliminated and in terms of recoveries, you will discover that state doesn't lose its revenues. No matter what you do, very high tax rates will never result in improved compliance of tax payments apart from breeding corruption. 
While GST enables Centre becoming stronger and weakening of states, endangering unity of federal structure of our diverse nation.

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