GST – Discourse towards effectiveness (Part 1)

GST – Idea of uniform indirect tax rates

Following the footsteps of Nobel laureate ‘James Mirrlees’, various economists broadly agree that indirect taxes should be uniform as is the nature of GST and the distributional concerns left to direct taxes and benefits transfers.

Materializing the 101st Constitutional Amendment

Section 19 of the Constitution (101st Amendment) Act mandates that the GST be implemented within one year of its notification. Section 20 calls for the President to “remove difficulties” in implementation, including the time line in transition to the new amended provisions but it is an emergency provision.

GST Act | Intricacies

the-implementation-of-goods-and-service-tax-gst-malaysia-34-638Informal consensus has been reached on many issues, essentially on a four-slab tax structure of 6, 12, 18 and 26% and of course, the zero rate for exempt items. Functionally speaking, exemptions once granted are difficult to withdraw, and multiple rates yielding progressivity of tax incidence and taming inflation are often misplaced beliefs. Hence, it is often advised that the GST Council should reduce the number of rates from five to three, or at most four.

Moreover, the coverage of GST would be ineffective with electricity, petroleum products, tobacco and alcohol for human consumption and land and building not touching the wand of the uniformity.

GST and it’s Pitfalls

Besides the usual hullabaloo over the trimming of ‘cooperative federalism’, the experts are vary of the extension of Centre’s tax base to the distribution chain of value addition beyond production, bringing services under the states’ tax net, having a uniform tax base for the Centre and the states, and elimination of tax export from one state to another.

But the non-statutory issues stem from within the application of the Act, such as -:

  • What if there are any slippages from the process of consolidation of the indirect taxes on domestic trade? The consolidation of many Central and State indirect taxes might reduce tax on tax and compliance cost.
  • There is a strong possibility of succumbing to the competitive lobbying pressure by the vested interests vying to include particular goods and services in the list of lower rate of levy or manipulating frequent changes in the tax structure itself. It should be ensures that there are no changes in rates except for their unification.
  • There is also a challenge of refund administration. Refunds under GST can be as much as 30-50 per cent of the gross collections. Fraudulent invoices under ‘dummy firms’ should be cautiously handled and expeditiously eliminated at the source itself. Delays in refund administration will result in inefficiencies, particularly in the export sector which requires dynamism and fast track solutions.
  • A gulf of trust between the Centre and state or among states needs to be taken care of too. Dual GST requires exchange of information and mutual reliance for administrative purposes. Hence, the trust on each other’s competence and integrity is essential.
  • GST has fostered both realistic and unrealistic expectations in the economy which needs to be effectively managed. By boosting productivity and investment, GST is expected to contribute to GDP growth. Estimates vary from 0.5% to as much as 2%. But this impact would depend on the tax rates, which are yet to be decided, which becomes all the more reason to contemplate further about its economic impact. Moreover, transitional problems associated with a new tax cannot be ruled out too. Both Canada and New Zealand faced adverse outcomes immediately after the introduction of GST, because of various exogenous factors.

Building up expectations paves path for reforms. But, when belied for unrelated and transitory short-run reasons, they spell trouble. Prudent economic management dictates less volatility in the market structure. The pinch of the indirect taxes created vagaries of cost overrun, especially with regards to the factors of production. Genuine uniformity should strike a definite chord with input costs and output revenue growth. Otherwise, GST would end up as yet another failed tax legislation which India cannot afford at this epoch of time scale.

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