GST: Some less explored issues

GST is being strongly backed by large businesses.
THE introduction of GST (goods and services tax) in the country is billed as the biggest tax reform in India and a game-changer. It has been stalled in the Rajya Sabha by the main opposition party which had proposed it a decade ago. The ruling NDA has rejected the objections and may call a special session of Parliament to get the Bill passed. Unfortunately, many critical issues regarding the basic design of GST have not been discussed and remain unresolved. The public needs clarity about them.
GST has three important elements. First, combining taxes like excise, sales and services. It is said that 17 taxes will be replaced by one, leading to ease of business. Second, the indirect taxes will be calculated on value addition and not the value of the good or service. This would remove the cascading effect of tax on tax and profit on tax.
Finally, not only would the cascading effect of each of the taxes (excise, sales, services and so on) be removed, but even that across these taxes would go. This would lead to a possible fall in prices, all else remaining the same. It is argued that this would lead to ease of doing business which could boost the growth of the economy.
Further, since value addition is only a fraction of the value of a product, if the tax rate remains the same as earlier, the tax collection would fall. Thus, if the government is to collect the same amount of tax as in the earlier tax regime, it would have to raise the tax rate under VAT. This is called the revenue neutral rate (RNR) and could be pretty high. Further, tax will have to be collected at each stage of production and distribution. So, even if the tax rate is a common one, collection of the tax will still be complex.
If the rate of inflation rises, demand in the economy would fall and the rate of growth will decline contrary to the argument by proponents of GST. To avoid this, the government will have to give up the RNR and fix lower rates of tax. But then the collection of tax will fall compared to the present and the states suffer. The deficit of the Centre and the states will then rise. This is the worry of the states. If the Centre tries to compensate them for the fall in revenue, as it is promising to do, the Centre’s deficit will rise even more which will create further problems.
These macroeconomic issues have not been debated or resolved in the rush to implement GST. Another ignored aspect is the interest of the small-scale and unorganised sectors. The small-scale sector produces and sells locally, so it would hardly benefit from a unified market, etc. It is being exempted from the payment of GST and, therefore, would not be able to claim credit for any purchase from the organised sector and would be at a disadvantage. If it sells to the organised sector, it would not be able to provide the benefit of setoff and, therefore, it would have to cut prices or its sales would decline. A decline in the small and unorganised sector would reduce employment generation since it is the employment intensive sector.
Take the example of potato chips or envelope-making where the large scale has displaced the cottage sector. Or, look at any ‘haat’ selling cheaper versions of products sold in the malls or regular shops. They are visited by the poor, the lower and the middle class who go there to buy products supplied cheap by the small and cottage sectors. Such products will also get displaced.
VAT is a difficult tax to implement since it requires keeping account of both the inputs (so as to claim setoff) and revenue from sales. The small-scale and cottage sectors do not keep detailed accounts and cannot calculate how much VAT to pay. That is the reason VAT requires computerisation which the small and cottage sector are not able to afford.
Due to such difficulties, VAT could not be introduced in the 1970s. The Indirect Tax Reform Committee in 1978 suggested MANVAT on manufacturing alone. This could not be implemented because of the existence of a very large unorganised sector in manufacturing. The long-term fiscal policy in 1986 suggested MODVAT that had to be introduced gradually, till CENVAT replaced it a decade later. Difficulties are being swept under the carpet. It is these difficulties that would also undermine the claims that compliance would improve under VAT and that the black economy would decline. GST, by introducing a common rate for all states, undermines fiscal federalism. Different states have different requirements. Needs of Maharashtra are different from those of Assam. The manufacturing states are worried about loss of revenue due to change of tax from source to destination and to accommodate them, the IGST has been proposed. Even though the states have arrived at a consensus and given up their powers, undermining federalism will have long-term effects which will not be visible immediately. The local bodies, the third tier of the federal structure, are entirely left out of the reckoning.
Finally, there are contradictions in the argument being made for GST. The tax-GDP ratio will rise if tax collection rises, but then prices will rise, demand would fall and the economy would slow down. Contrariwise, if the RNR is given up, the tax-GDP ratio will fall and states’ resource position will deteriorate. The macroeconomic analysis shows that either way the government’s argument is contradictory.
— The writer is a retired professor of economics, JNU
Source: The Tribune


Leave a Reply

Your email address will not be published.

Solve this and then Post Comment *

scroll to top