GST in India – Miles to go

One hurdle crossed

This is no time to sleep. GST Bill has cleared the LS hurdle. A remarkable achievement in of itself for a government often accused of ‘bulldozing’ and ‘arrogance’. But the RS hurdle remains. At worse it may get passed in first few weeks of July. Shamefully, Congress walked out instead of supporting their own bill for flimsy reasons. After all, most the amendments to their bill was the product of further consultation and consensus building by Jaitley. Because of their rabid opposition for opposition sake Congress is losing valuable chance to claim credit for this bold reform.

A long to-do list

But this is only the beginning. There are many things that need to be done right and right on time to make sure the growth boost that GST can provide in theory happens in reality. Let’s look at a few of them

The Rate

Yes, Arun Jaitley has clarified 27% is high and will not be the final figure. But what’s it going to be? We don’t know. The unwieldy looking GST Council will set the rate. Hopefully it will be something around 16% not higher as India is already a high tax country. GST is also regressive, i.e., it taxes poor more heavily than the rich. After all poor spend more save less. In the long run a sensible balance between income and consumption tax is the key to national competitiveness. Very hard to achieve in a federal setup though.

How many rates? This is another key question. Purist fanatics may argue for one rate, no exemptions to keep things simple. But then this is impractical for India. We are going to live with multiple rates, and exemptions to a whole lot of goods, some justified by nothing other than political expediency. This makes accounting complex. ¬†And pushes up rates for the taxed items. Here we would argue it can be ‘mission accomplished’ if the rates are kept to as few as possible (say 3 at most) and exemptions at bare minimum.

The Paperwork

This is the most significant of all. After all, a key benefit of GST is supposedly simplified compliance. But this means several things

The monthly return form has to be kept as simple as possible. For example, in Singapore, most businesses simply fill in three or four numbers. Purchases, Input GST, Sales, Output GST, Net owed/due. That’s it! More rates will mean more breakdowns. But despite that it can be kept simple if there is bureaucratic will.

Information should be asked for on exception basis, only if evasion is suspected or arising from random checks. There is absolutely no need to ask for detailed information from each and every business, drowning the babus in mountains of useless data.

The registration process has to be instant, online and the exemption limit for optional registration kept at sensible levels. The paperwork has to be so easy, small businesses should opt to register instead of fearing the process to stay out of GST altogether. This helps them get input tax credit. It also helps the Government – it gets to tax the last bit of value add (retail margin) and gives access to statistics of consumption and business activity otherwise lost.

The process of proving input tax should also involve as little paperwork as possible and kept simple. If refund cannot be claimed, businesses would find ways to stay out of the system and not pay output tax as well. Here again, the returns filed should be taken as true, with stringent penalties for wanton wrong declaration or false claims. This is easier said than done. Our bureaucracy is used to treating every businessman as a criminal in order to setup a complex system that is then used to milk bribes and favors. And provide rent seeking opportunity to unproductive “experts”, accountants, fixers and the like. What makes GST even more challenging is the input may have been taxed in another state. This gives lots of incentives for the state where the output is taxed, to deny input credit or insist on onerous, impractical documentation. This could be due to irrational fears or simply to increase ‘revenue’ opportunities for babus and netas. This is where the Central Government should control the process to ensure transparency.

The Coverage

A lot has been said on numerous items left out of the GST system. What this means is the input tax spent on producing those items gets cascaded, losing the GST value-add benefit. This obviously hits industries using these products as their key input and its final consumers. And there’s lots of them.

It also means fragmented production capacities for items like alcohol. It would be near impossible to setup large scale bottling and canning lines for beer or wine, for instance, to be produced where it makes sense, and shipped to consuming states. Getting states to agree to this, when they get huge percentage of their revenue from alcohol is going to be impossible.

Here again, we would argue for taking pragmatic look at what is sale-able in the current system and not waste time insisting on perfection along Singapore or New Zealand lines. This is where agenda driven columnists that have been slamming the ‘imperfect’ GST get it wrong. Perfection¬†is something we should work on for the medium and long term, savoring minor victories along the way.

Hopefully once states see the tangible benefits of GST system, they will be more amenable to including more items with the assurance that they don’t lose out on revenue.

The Process

One advantage of a fragmented tax system was that states could decide quickly on what gets taxed, how much and when. The GST system introduces a rather complex consensus process which has to be activated for every major change.

We have to see how this works out in practice. It is too early to comment.

Other concerns

We are not as concerned about the 1% cascading tax as others seem to be. It is supposedly temporary, and even if it becomes permanent, if it helps get GST off the ground, it may pay for itself in more ways than one. After all it is better to get started somewhere instead of spending another decade building a perfect GST.

Something is better than nothing!

All said, something is better than nothing. Past experience tells us, be it in aviation policy, telecom liberalisation or for that matter anything else, the “Indian way” is to get going with something imperfect and once it becomes part of landscape, patch it up along the way. It will still be something imperfect by any rational comparison, but if you look back 20 years you’d go “Wow, that’s a lot better!”

GST is no different

 

Author: Agent Yellow

A highly trained propaganda agent! Yellow is my favorite color!