It might be useful to begin by quickly summarising the business case for GST.
The GST is a tax reform that has been on the cards for more than a
decade. In principle, it is the same as the Value-added Tax (VAT) —
already adopted by all Indian States — but with a wider base. While the
VAT — which replaced the sales tax — was imposed only on goods, the GST
will be a VAT on goods and services.
In the current tax regime, States tax sale of goods but not services.
The Centre taxes manufacturing and services but not wholesale/retail
trade. The GST is expected to usher in a uniform tax regime across India
through an expansion of the base of each into the other’s territory.
This is why a constitutional amendment was necessary — to give
concurrent powers to both the States and the Centre to make laws on the
taxation of goods as well as services.
Not surprisingly, the economic arguments trotted out in favour of the
GST are basically the same as were given two decades ago for the
introduction of VAT. These are twofold.
First, the GST, by subsuming an array of indirect taxes under one
rubric, will simplify tax administration, improve compliance, and
eliminate economic distortions in production, trade, and consumption.
Second, by giving credit for taxes paid on inputs at every stage of the
supply chain and taxing only the final consumer, it avoids the
‘cascading’ of taxes, thereby cutting production costs, and making
exports more competitive. According to the Union Finance Minister Arun
Jaitley, thanks to these efficiencies, the GST will add 2 per cent to
the national GDP.
Only time will tell whether the GST will have a positive impact on the
GDP. But there is one thing the GST will not have a positive impact on:
the States’ fiscal, and therefore, political autonomy.
A losing proposition for the States?
Things don’t look all that dire on paper. As per what’s being referred
to as the GST Bill – which is actually the Constitution (122 amendment)
Bill, 2014 — passed in the Lok Sabha last month, India will have not a
single federal GST but a dual GST, levied and managed by different
administrations. The Centre will administer the central GST (CGST) and
the States, the SGST. The monitoring of compliance will also be done
independently at the two levels.
However, as Kavita Rao, professor at the National Institute of Public
Finance and Policy (NIPFP) and member of one of the Working Groups
constituted on GST by the Empowered Committee of State Finance
Ministers, points out, when you move to a GST regime in a federal
set-up, some curtailment of the State’s freedom is inevitable. “All
goods and services will be divided into certain categories. The rates
will be fixed by category, and if I am a state, I cannot shift a
commodity from a lower to a higher rate, or put it in the exempt
category.”
This is not the only limitation. The rates for both, the CGST and the
SGST, will be fixed by the GST Council, whose members will be State
finance/revenue ministers and chairman will be the Union finance
minister. Once the rates are set by the GST Council, individual States
will lose their right to tax whichever commodities they want at the
rates they want.
This development needs to be viewed in the context of a steady erosion
in the states’ freedom to decide on taxes and tax rates. The economist
Prabhat Patnaik points out, “According to the Constitution, the States
have complete autonomy over levy of sales taxes, which, on average,
accounted for 80 per cent of their revenue. An attempt was made to
curtail this autonomy with the introduction of VAT. But it did not
totally succeed because the VAT still had four different rates that
states could play with. But with the GST, which mandates a uniform rate,
even this limited autonomy would be gone.”
In other words, while the loss in revenue of the States may well be
compensated by the Centre (as provided for in the GST Bill), how does
one make good a State’s loss of the political right to fix its own tax
rates?
Ms. Rao believes this is not necessarily a bad thing. “Individual States
are always catering to some interest group or another. By placing
limits on what they can do, we are effectively empowering them to resist
interest group politics, where someone or other is always lobbying for
concessions or exemptions.”
But this is a problematic argument. “The underlying assumption here,”
says Mr. Patnaik, “is that political representative bodies are
irresponsible. So give them less power, less discretion. This is a
fundamentally anti-democratic vision of development.”
Moreover, the restrictions imposed by a uniform tax regime could
adversely impact States that may be more committed to welfare
expenditures. “The AIADMK or the Left Front or Mamata Banerjee may have
their own development philosophies,” says Mr. Patnaik. “In order to
express these philosophies, you have to be able to control your tax
revenue. Why should I give up this right which I already have — and be
sitting in some Council where I will be outvoted by other states or the
Centre telling me what I can or cannot do?”
Perhaps it is to allay this concern that the draft GST bill speaks of
the GST Council fixing not just rates but “rates including floor rates
with bands”. A band would, at least on paper, give some room for states
to vary their rates depending on their need.
A floor-rate-with-band model (as opposed to a uniform rate) of GST is
also what Ms. Rao is rooting for. “To my mind, it is the procedures,
definitions, and credit rules that should be uniform for a harmonised
tax regime. We should let the States figure out what rates they want.”
However, a GST regime where each State has a different tax rate for
different goods and services doesn’t sit well with the industry demand
for a single national market with a uniform tax regime. Besides, if
rates will be different, the taxes will be dual, and the dual taxes will
be administered independently by the States and the Centre, why not
just streamline the existing tax architecture instead of erecting a new
one?
The social dimension
The answer to this question leads us to the other aspect of the GST, to
do with why it started to get widely adopted (as VAT) from the 1970s,
paralleling the rise to global dominance of neo-liberal economic
thought.
The GST, even in the diluted version proposed in the GST Bill, would
still accomplish one thing: widen the tax base and make it identical for
both the Centre and the States. That is because, unlike, say, an excise
duty (whose base consists of manufacturers) the GST is paid only by the
final consumer. The seller of the good or service remits this GST to
the State after deducting the taxes already paid by him earlier in the
supply chain.
In other words, while the GST, like all indirect taxes, is a tax on
consumption, in seeking to institute a uniform rate on all forms of
consumption, it tightens the tax net — currently riddled with numerous
holes in the form of multiple rates and exemptions and classifications —
in addition to widening it.
Many countries that have embraced the GST have also exempted essential
commodities from it, or kept lower rates for select goods. But the very
logic of GST is such that it works best when the exemptions are zero or
minimal. New Zealand comes closest to the GST purist’s dream — with very
few exemptions. Once implemented — in however compromised a form — this
is the direction GST regimes gravitate toward: fewer exemptions, higher
rates. New Zealand introduced GST at 10 per cent — today it is 15 per
cent. In the countries where the GST rate was reduced over time, it was
made possible by a broadening of the base by minimising exemptions.
This brings us finally to the question that has monopolised the GST
debate of late: what should be the taxation rate? The report of the 13th
Finance Commission’s Task Force on GST recommended 12 per cent (7 per
cent for SGST and 5 per cent for CGST). That was in 2010. In 2014, a
panel of State government representatives mooted a revenue-neutral rate
or RNR (rate at which tax revenues for states and the Centre will remain
the same as before GST) of 27 per cent ( 12.77 per cent and 13.91 for
CGST and SGST respectively.
Both these rates might be unrealistic. A 12 per cent GST will most
definitely mean substantial revenue losses for states, as the general
VAT rate for many states hovers around the 13-14 per cent mark. And from
this week, the service tax (levied by the Centre) has gone up from
12.36 per cent to 14 per cent, a move, ironically enough, intended to
smoothen the transition to a GST regime.
A GST rate of 27 per cent, on the other hand, would impose an enormous
tax burden on the wage-earning classes, and could prove fatal for any
elected government. Understandably, Mr. Jaitley has been quick to
clarify that the GST rate would be much lower than 27 per cent.
In fact, the ideal way to bring down the GST rate without incurring
revenue losses is to widen the base by including as many goods and
services under its purview as possible. But this could mean that some
essential goods currently taxed at a lower rate could end up being taxed
at a higher rate under a GST, but it would hit the lower income groups
harder.
This might explain why in some developed countries, including Canada and
Australia, the introduction of the GST was opposed fiercely by the
local working classes, especially the trade unions. The resistance to it
was so strong in Canada that the then Prime Minister Brian Mulroney had
to invoke an obsolete, colonial era provision of the Constitution —
drawing on special powers of the Queen — to get the law passed in the
Senate.
At any rate (pun unintended), the GST can only be implemented, believes
Ms. Rao, by “a leap of faith”. She elaborates, “You can’t do a
calculation to the last penny and say only at this revenue-neutral rate
will I implement GST. It has to be acceptable to the masses, because at
the end of the day, it is the average citizen who has to cough up the
money.”
The shift towards indirect taxation
Around the world, governments, faced with declining tax revenues, and
too fearful that higher corporate taxes will lead to capital flight (or
capital slumber), have been turning their attention to indirect taxes,
which have a wider base than direct taxes, are more difficult to evade,
easier to administer, and not income-dependant beyond a point.
It’s because the poor and the working classes spend a greater proportion
of their income on essential consumption compared to the classes that
are better off, that indirect taxes are considered regressive compared
to direct taxes, which are typically proportional to the ability-to-pay.
India isn’t immune to this global shift in favour of indirect taxation,
accompanied by lower taxes on capital and reduced social spending.
The National Democratic Alliance government has already ticked two of
those boxes. The 2015-16 budget, which fixed a roll-out date for GST
(April 1, 2016), also abolished the wealth tax, and announced a lowering
of corporate tax rate from 30 per cent to 25 per cent over a four-year
period. According to Mr. Patnaik, the same budget also grants direct tax
concessions to the tune of Rs. 8,315 crore, while planning to raise Rs.
23,38 crores through indirect taxes.
This is despite that fact that India’s direct taxes contribute only 37.7
per cent of total tax revenue, according to a 2013 study by the Center
for Budget and Governance Accountability — which makes India’s taxation
regime already more regressive than that of other emerging markets such
as South Africa (57.5 per cent from direct taxes) or Indonesia (55.85
per cent). When the third box, the GST, is ticked, it could become even
more so.
GST: The Arguments
The business argument
--> Simplifies tax administration
--> Makes compliance easier
--> Prevents 'cascading' effect
--> Could add to GDP
The political argument
-->Reduces States' fiscal and political autonomy
--> States can't exempt some goods and services
--> Lowers States' source ability to raise money for welfare
--> Indirect taxes burden lower income groups more
What's a right GST Rate?
--> In 2010, the 13th Finance Commission
recommended 12 per cent GST. This will mean revenue loss for States, as
VAT is already 13-14 per cent
--> In 2014, State government
representatives mooted a revenue neutral rate of 27 per cent. This will
be an enormous tax burden on wage earners
Source: http://www.thehindu.com/opinion/op-ed/gst-good-for-business-snag-for-federalism/article7279180.ece
