NEW DELHI: The Goods and Services Tax (GST) has excited substantial debate over the last decade. Our Constitution divides taxation powers between Union and the states each of whom has some exclusive areas where they can levy tax. The Constitution Amendment Act (2016) for Goods and Services Tax (GST) re-writes hitherto constitutional indirect taxation arrangements.

The Act defines GST as any tax on supply of goods and services other than on alcohol for human consumption. GST is a value added tax, levied at all points in the supply chain with credit allowed for any tax paid on inputs acquired for use in making the supply. Exemptions would be restricted to a minimum.

To understand the import of GST, it is necessary to understand the magnitude of revenue collections in the indirect taxes category. In 2014-15 (BE), customs collections were estimated at Rs. 2.02 lakh crore, Union excise duties at Rs. 2.06 lakh crore and service tax at Rs. 2.16 lakh crore. Against this, indirect taxes imposed by states were estimated at Rs. 8.65 lakh crore. Indirect taxes account for 67% of the total revenue of Rs. 22.38 lakh core in 2014-15. Thus GST would cover 67% of the nation’s revenues, hence its criticality to our economy.

Debate on the positives and negatives on the GST Act are evenly dispersed. On the positive side, experts’ claim that a unified market would emerge, that would make investment easier and enable Indian goods and services to compete in the global market. It would dramatically reduce leakage of revenue and cut down on corruption that is endemic to the present fragmented indirect taxation structure. Harmonization of center and State tax administrations would reduce duplication and compliance costs while automation of compliance procedures would reduce errors and increase efficiency.

Inter-state procurement could lead to consolidated supply chains while removal of tax at manufacturing point would mean radical changes in distribution of goods and concomitant reduction in costs of doing business seamlessly across states. Removal of the concept of excise duty on manufacturing may improve cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory. Interest on working capital would therefore decline. In principle, GST is therefore a laudable reform.

On the flip side, a substantial percentage of the gross indirect taxes collection of Rs. 14.89 lakh crore (Centre + States) in 2014-15, Rs. 3.32 lakh crore, on account of tax/duty on electricity, POL and alcohol for human consumption (that accounts for the vast majority of state excise collections) are presently excluded from the ambit of the GST Act. In effect about 18-20% of all indirect taxes will be excluded while computing the basic GST rate. Any hike in these duties/taxes subsequently will therefore add to the basic GST rate. There is no agreement on the basic GST rate with ranges of 15-24% being suggested by the Union and States. The higher the basic GST rate greater the propensity to evade GST and counter-productive recourse to generation of black money. Conversely, a lower GST rate would incentivize mass compliance on volumetric basis and substantially enhance revenues for governments.

The GST Council would decide on all future hikes in the basic GST rate and decide on the quantum to be transferred to states. The Centre would have 33% of votes while the balance will be exercised by the States as members. If this Council’s decisions are made on simple majority basis, and the ruling party at the Centre with its same-party states cross the 15+1vote mark (29 states and the Union), this could place states ruled by opposition parties at a distinct disadvantage.

The destination-based GST may work to the disadvantage of major manufacturing states like Tamil Nadu that derived their revenue at the point of manufacture. Now that the GST will be collected at the final point of consumption, populous and often averagely administered states like Bihar would generate higher GST revenue and become eligible for larger share of GST revenues from the Centre. There would be little incentive for states to attract investment, instead promote consumption that is self-defeating. Likewise, states with relatively low populations, hence lower consumption and GST share, but located in desert, hilly or remote terrain (such as in NE India) and attendant higher infrastructure and administration costs may be sufferers. How GST would tie in with the 14th Finance Commission’s accepted recommendations remains to be seen.

Consumption-based GST on a standard formula may prove deleterious to the needs of states, particularly in NE India. Their limited GST share may be compounded by virtual nullification of Centrally-sponsored/aided schemes from 2015-16 and onward, apart from persisting relatively high inflation. Their representation on the GST Council is unlikely to help much, particularly if they are ruled by opposition parties. In the successful passage of the GST Act, states would indubitably lose their larger share of the flexibility of targeting development funds or flexing them to attract investment, both of which are state-specific.

In sum, the Government of India with its veto power in the GST Council assumes an unassailable position in the finances of a state and, by logical extension, over its politics – a critical pointer to a fast-emerging centralized polity under NDA 2.0, enough reason for resistance by states that perceive a ‘raw’ deal in the process of the state GST Acts. This is probably why neither the US nor the EU, nor Scandinavia – all federations - adopted GST.

GST is technology driven. While the Govt. of India proposes to train about 60000 personnel to operate the collection, accounting and transfer of state share systems, GST would require extensive complimentary training at every level of the procurement-manufacturing-intermediates-sales chain. In addition, small retailers would have to invest in expensive electronic hardware and real-time Internet connectivity coupled with hiring trained personnel that may not be easily available for the first few years.

GST would therefore need a reliable high-speed backbone and reliable distribution networks with cent per cent up time in a nation where the frequency of dropped mobile calls and erratic data transfer lines is amongst the highest in the world. Similarly, banks in remote parts of the country would also require trained personnel and hardware (and problematic maintenance) to receive and account for GST receipts.

There are other related issues. For instance, how would central and state indirect taxation departments be reorganized and would there be any major savings on HR and administration costs in an automated environment? How would politicians that have made a living of extortion at all toll/octroi gates to fund their vaulting political ambition and financing their own private mercenary goon armies, notably in Assam and many other parts of NE India, sabotage the implementation of GST? Would a captive broadband network be available for GST and what costs are involved in government and private businesses? Would any financial assistance be available from government for small business to invest in GST hardware? Where would business hire GST-conversant personnel to operate the system and how would they finance such costs?

The key to the success or failure of GST is the basic tax rate and fairness in the distribution of GST revenue. India has no social security system, hence bears no comparison to high rates of up to 25% in some developed countries. While limited exemptions are welcome, yet Australia with a 10% basic GST rate exempts basic foodstuffs, water, sewerage and drainage services, health, education, religious and related supplies, child care, supplies of going concerns, and international transport and mail, etc. Likewise, New Zealand with a 15% basic GST rate has generous social security and health care for its citizens. Then, shouldn’t India’s basic GST rate be in the range of 10-12% without exemptions?

The drafting of the CGST and SGST Acts will indubitably be a contentious and long-drawn affair. Likewise, implementation is likely to be a torrid affair with inspired politico-economic opposition and mounting capital and maintenance costs in a nation with poor infrastructure. Yet GST, if finally implemented, will be a path-breaking reform, the precursor of equal radical replacement of India’s wrecked administrative, judicial, education and many other systems that hark back to colonial times when these ran with far greater success.

(The writer is a senior public policy analyst and commentator)

Latest News

SHANTANU BASU

    Shantanu Basu, a history and management graduate from St. Stephen's College and University of Queensland, Shantanu Basu held several senior civil service positions in the Govt. of India for over three decades. He presently lives in New Delhi and his first book, The Worm Within: Corruption and Erosion of India's Accountability Institutions was published in June, 2015.