Friday 30 June 2017

GST: Is it a game changer or name changer?

Goods & Services Tax (GST) is a destination based indirect tax throughout India that replaces all indirect taxes levied by the central and state governments. 
  • GST in its simplest format is 'one nation, one tax'. But in its mangled format consists of CGST, SGST, IGST and six tax slabs. Petroleum products, alcoholic beverages, property registrations, electricity duty etc, which are money spinners for centre and states, are kept outside the purview of GST. Hence GST in India is no different than existing VAT.
  • In Singapore GST is 7% on all goods or services.
  • USA being a federal republic, state and local governments fiercely defend their autonomy. At present, there is neither federal tax nor GST on goods and services.
  • Modi (as Gujarat CM), Jaitley (as opposition leader in Rajya Sabha) and BJP (as opposition party) vehemently opposed GST bill of UPA for several years on the pretext that states will lose their autonomy and is in violation of federal spirit of constitution. And GST Network and databases requirements fulfillment is several years away.
  • So far states enjoyed financial autonomy with freedom to levy taxes to fund its governance, welfare & development activities. VAT forms bulk of their revenues and with GST, states are at the mercy of centre until it releases their due share of GST collections and also compensate transition losses for five years. Our central government is notorious for scrutinizing the state's claims for several months before releasing the amounts to states. With GST, Modi has undermined states autonomy and converted them into another level of Municipalities that will survive at the mercy of Centre.
  • Now Modi as PM, Jaitley as FM and BJP as ruling party, suddenly discovered that GST could be India's biggest tax reform, that will facilitate ease of doing business and boost GDP growth by two percentage points and will become a game changer. 
  • GST Bill which is a constitution amendment bill that requires passage by states also and in the process several items like alcoholic beverages, land registrations, electricity duties etc were kept outside GST. Centre too has its own interest in keeping petroleum products outside GST which yields huge revenues. Also yielding to states instead of one slab taxation we have six slabs viz. 0%, 3%, 5%, 12%, 18% and 28%. And also SGST levied by states, CGST levied by centre and IGST shared by centre & states. Thus Modi & Jaitley squandered a huge opportunity and mangled GST is no different from VAT and hence will become just a 'name changer', not a 'game changer'.
  • GST's threshold limit of Rs.20 lakhs and its complexities will compel small entrepreneurs not growing beyond Rs.20 lakhs to avoid GST and mushrooming of small enterprises outside GST is a certainty. 
  • GST processes all being online with computers and internet and ironically only cities and most towns have robust connectivity and rest of India is mostly unconnected. Even databases are not fully ready.
  • Australia, a country with 24 million population,  introduced GST in 2000 with one full year for transition and databases preparation. Yet economy retracted for several quarters and looked up only after three years. 

Tax policy is as good as its administrators.
Any policy which hurts a honest man on street, is a bad policy.

My View:
Any disturbance or calamity whether man-made or natural, hurts the poorest people most. GST will result in dismantling the existing taxation system and installing new system on a cut off date. How ever simplified GST might be, understanding, clarity and adaption by all spectrum of traders will take several months. In the meantime supply chain of commodities will get disturbed and shortages and inflation is imminent. No one is clear how the impact would effect civic life. Like demonetization, intended good may happen after some time, unintended consequences would be immediate and is sure impact poor peoples lives and livelihoods. How many lakhs of jobs, especially in informal sector, will vanish will never be known. Most Indian laws, rules & policies are good. The problem is with tax administrators saddled deep rooted corruption, indifference and lethargy. Among all virtues of Indians, tax evasion is also an important virtue. Modi & Co so far made no attempt to control corruption except at himself. Not appointing Lok Ayuktha even after 3 years of passage of Act is indication of his respect for constitution and laws of the land. Modi hasn't learned any lesson from 'failed demonetization' which destroyed informal sector and impacted agriculture greatly pulling down GDP growth by 2 percentage points. Now, hurried roll out of GST, mangled beyond recognition, will not have a smooth ride and its impact stories will start surfacing incessantly after 2-3 months. Then nothing can be done except sympathizing poor who will be suffering most due to Modi's reckless adventures only to please FIIs and World Bank rather than people of India. Above all is his deep rooted desire to show off as a greatest reformer of the nation, not knowing what exactly he is doing.

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