Why GST is trouble

Australia has a GST (Goods and services tax) rate of 10%, France has 19.6%, Canada has 5%, Germany has 19%, Japan has 5%, Singapore has 7%. India’s rate of GST is set to be the highest with a figure of 26% being bandied about lately. Why do we need to pay 26%? Till recently, the Congress party was insistent that #GST rate be 18% and that the cap on it should be in the Constitution amendment bill. Now they have softened their stance, doing a major disservice to the citizens. Senior congress leader #JairamRamesh has said that “If the cap in the constitution amendment bill is unacceptable, then the government can explore the option of keeping it in the GST bill… If the government wants, a creative use of the English language can solve the impasse.” This ‘creative use’ is going to come back to haunt the middle class as the government can go on raising the GST rate at will. Fixing the rate in the legislation would have made the system extremely rigid as the Constitution would have to be amended with a two-thirds majority if the rates needed to be changed in the future. Keeping it in the GST bill instead shows that the government has every plan of raising it higher from the 26% they will start with.

GST has long been projected as the panacea for a lot of the troubles that India Inc faces. It has been described as the tax to replace all the indirect taxes and one that will help free movement of goods across state borders. The reality is that GST may only add to the mess instead of solving anything. In its current proposed form, GST would have a dual structure comprising a central component levied and collected by the centre and a state component administered by the states. The central component would comprise central excise duty, service tax and additional customs duties. The state component will include value-added tax, entertainment tax, luxury tax, lottery taxes and electricity duty. Central sales tax (CST) will be phased out entirely. Entry tax or octroi would be subsumed from the start.

Like in the case of VAT and Service tax, currently, the supplier will be able to off-set the levy through a tax credit mechanism. This means, if someone buys oranges, sugar and cans and sells canned orange juice, they can set off the GST they have paid on the purchase of oranges, sugar and cans against the GST collected on the sale of the orange juice cans. This works in theory even now with VAT and service tax. The reality is that a lot of small businesses find complying with the current system very inconvenient. So they either fail to claim the input credit and eat the cost or they do not pay the tax at all. This is why, while mega sized companies are keen on GST, it will work against the interest of small business who will continue to find the system cumbersome. This has also resulted in over 1 million service tax assessees not paying their taxes and being classified as defaulters.

Petroleum products, tobacco and alcohol will not be covered by GST and this is not surprising. Alcohol and tobacco have long been heavily taxed by opportunistic governments, well aware of the inelastic demand for them. Demand for petroleum products is also relatively inelastic and the sales are massive. The overall taxation on these is well above 26% and the government wouldn’t want to lose revenue by bringing them under GST, at least for now.

Additionally, even if we assume that GST will replace all existing indirect taxes, there is no reason to believe that the government will keep its word. There is absolutely nothing to prevent the government from imposing a new indirect tax. Right now there’s a free for all, with the Kerala government announcing fat tax on pizza, burger and other junk food last week and Haryana proposing a new indirect tax to fund protection of cows. The centre has introduced a cess for #SwachhBharat. We already pay primary and secondary education cess. A cess for for relief of Bangladesh refugee that is imposed on bus tickets has been in force since 1971. What is to prevent the government from introducing a new indirect tax? This makes all the spreadsheet calculations that you see on the internet, only speculative and fantasy. Also, since there is a state component and central component, the state component of the tax may end up becoming a bargaining tool for political parties in coalition politics, at the cost of the citizen.

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