The economists feel that GST may boost our GDP growth by up to 2 per cent, enough reason to make sure that it is passed in the current session only and implemented w.e.f. the next financial year.
Governments collect revenue from public in the form of taxes, duties and cess, etc. levied on incomes, production and distribution of goods and services. Direct taxes viz., Corporation Tax and Income Tax are levied on incomes of companies and of individuals above a certain floor. Indirect Taxes on the other hand are duties, taxes, cess, etc. levied on goods and services which cover most of us as consumers. These goods and services include those that are used in the production through distribution to final consumption. There maybe several stages between the raw materials and the finished products.
Taxes may thus be levied on raw materials, intermediate goods and the consumer goods as also on the various services rendered in production and distribution. Each government may have its schedule of goods and services and rates they are being taxed. Some may not tax many goods and services or tax them at much lower rates so as to make them affordable to the weaker sections and simultaneously tax heavily the goods and services the consumption of which they may ostensibly like to discourage i.e alcohol, drugs and tobacco, etc. Plethora of such schedules leads to complexities, confusion and problems in compliance.
Taxes levied at different stages lead to cascading effect or tax on tax. Thus, the Sales Tax on the finished product may include not only tax on various goods and services but also on the taxes already levied at various stages of production and distribution. This leads to excessive burden, which at present may add up to 25-30 per cent of the price paid by the consumer. This in turn may lead to avoidance, evasion and non-compliance. Many times collection and monitoring of compliance may itself constitute a very high proportion of the tax revenue. High rates of taxation may actually not lead to high but lower collections. It is also a big put off for investment both domestic as well as foreign.
Earlier, Income Tax revenue used to be onerous and steep. Applying Laffers Curve it was scaled down to curve evasion and expand tax payers’ base, which has significantly increased revenue from the same. Our existing indirect tax system has also witnessed some reforms in the form of abolition of octroi and use of value added concept-Value Added Tax (VAT). We have had Octoroi, Sales Tax, Central and State Excise Duty, Customs Duty, Service Tax, Entertainment Tax, tax on lotteries and gambling etc. etc. Value added system has been brought in force in the form of CENVAT on Central Excise and VAT in place of State
Value added taxation takes care of the cascading effect by providing for credit for the taxes paid on inputs from those collected on the output. But VAT has not solved our problems of plethora of tax schedules in states and at the Centre. GST aims at having one rate for all goods and services with tax credits being provided as per VAT regime. Thus for instance we may tax all goods and services uniformly at 18 per cent all over the country by allowing tax credits for collections at the various intermediate stages.
World over 130 countries have already adopted Goods and Service Tax (GST). It was the Vajpayee Government, which initiated action on GST by appointing an empowered committee. In 2003, the Kelkar Task Force suggested GST based on VAT regime, which involves giving tax credit for the taxes already levied on inputs from the tax on output. Budget 2006-07 proposed adoption of national GST by FY 2010.155th. Constitution Amendment Bill 2011 lapsed with the dissolution of the 15th Lok Sabha. The Constitution (122 Amendment) bill introduced in December 2014, was passed by the Lok Sabha in May 2015. It is pending before the Rajya Sabha and is under reference to the Select Committee. Once passed by it, the ACT will come in force from April 1, 2016. All except three Opposition parties are now supporting it. The main Opposition in the Rajya Sabha—the Congress Party is insisting on three points including 1) removal of the provision of up to one per cent tax on inter-state trade the proceeds from which will be given to the supplier states; 2) constitutional ceiling of 18 per cent on the GST rate and 3) provision for an independent dispute resolution mechanism instead of leaving it to the GST Council.
The Government is expecting a report from CEA Arvind Subramaniam by first week of December regarding the rate of GST. A constitutional stipulation of GST at a particular figure i.e. 18 per cent would make it extremely difficult to subsequently change it even when expedient. The pending Bill has stipulation of a high powered GST Council headed by the Finance Minister with representatives from all State governments as members. One third of its votes will rest with the Central government and two third shared by the various states. All decisions will be by 3/4th majority of the votes cast. It is this Council, which will decide which goods and services are to be exempted, threshold turnover for levying GST, the rate of GST, model laws, special provisions the eight hill states, etc. This leaves scope for paralysis to creep in for want of majority in the Council.
When we are amending the Constitution we should ensure that all or most of the desired changes are incorporated. If we are going to have separate GST (IGST) for the Centre and for the various states (SGST) much of the anomalies of the existing system may persist. The rationale for not including alcohol for human consumption must be explained. Why leave so many things for the Council to decide that too by 3/4th majority? Similarly why keep this provision of 1 per cent tax on inter-state trade even for two years. Exhaustive list of goods and services to be covered, laws and bye laws, threshold limits and the GST tax rate ceiling, origin state etc. may be considered at this stage only. Thus let the Bill be discussed in its entirety by the Rajya Sabha and valued views of Opposition be considered on merits. Congress party too may cooperate constructively to pass the Bill that does the Parliament proud.
It is expected the GST will cover most goods and services. If the states leave too many of them as exempt much of the advantage of lowering the rate will be lost. Since evasion will become extremely difficult and with low tax rate not worth the trouble, the tax assesses base is itself expected to increase by five to six times. Its operation must be automated leaving little room for disputes. Thus let all the essentials be in place before the implementation date. If the idea is to have one simple, single, harmonious VAT regime at a low rate for all goods and services through a Constitutional amendment let us do it in one go.
Economists feel that GST may boost our GDP growth by up to 2 per cent, enough reason to make sure that it is passed in the current session only and implemented w.e.f. the next financial year.
JP Dubey (The writer is a senior columnist and has expertise on development issues)