The Modi Masterstroke: How GST unified India
July 1, 2019, marked the second anniversary of the Narendra Modi-led government's landmark indirect tax reform — Goods and Services Tax (GST), which is based on the premise of ‘One Nation One Tax’, which makes India a unified common market. It is a single destination-based multi-stage tax on the supply of goods and services — right from the manufacturing to the consumption stage. Credits of input taxes paid at each stage are available in the subsequent stage of value addition, which makes the GST essentially a tax only on value addition at each stage.
It is indeed the Input Tax Credit (ITC), besides a whole host of other progressive moves, which make the GST — as we know it in India — superior to any other consumption-based or Value Added Tax in any other country.
For example, GST was implemented in France for the first time in 1954 with the standard rate being 20%, largely speaking. It came into being in New Zealand in 1986 at 10% (with the current rate being at 15%) which is applicable to all purchases, but there is no GST on residential rents and financial services. GST was initiated in Singapore at 3% in 1994 and is now 7%. In Indonesia, imports are subject to both Value Added Tax (VAT) and GST, with the luxury tax on imports being between 10% and 50%, but most exports are exempted from GST. The indirect tax rate in Indonesia is largely between 10% and 35%, while in Brazil, though average tax rate for food products is 7%, the average VAT for most other items is between 17% and 20%, with an additional cess on inter-state supplies at between 4% and 25%. There are some items that also attract a ridiculous rate of as high as 330%, as part of the IPI which is a federal tax levied on most domestic and imported manufactured products, with a 0-330% range.
In China, there are three tax rates — 0%, 5% and 19% — but with very few items that are ‘recoverable’ or that enjoy the benefit of the input tax credit. The GST rate in Canada is 5% on supplies of goods and services in most provinces. There is also the HST or Harmonised Sales Tax which is between 13 and 15%. British Columbia, a Canadian province, discarded GST and went back to Provincial Sales Tax (PST), within just 2 years of living with GST.
What the aforesaid GST data pertaining to other countries highlights is the fact that there is no single kosher GST rate. In fact, there are over 40 different GST structures in 160-odd countries where it is applicable.
Indian GST is unique due to the sheer array of numbers involving a country of 1.30 billion people and counting. For instance, there is this obnoxious attempt by naysayers to compare India with Singapore — but these critics conveniently forget that Singapore, with a population of 5.6 million is less than half of Mumbai with a population of over 13 million, and growing. Also, Singapore witnessed skyrocketing inflation within a year to 8.4% after GST was implemented — whereas average retail inflation in India since July 2017 has been consistently below 4% in most months, barring a few months when it breached that figure.
No country with India’s geographical size, complexity or population could have reined in inflation amidst a choppy global environment and still effectively execute GST — but the Modi government did that and much more. In effect, of the 160 odd countries that have adopted GST, only 49 follow one tax slab module, 28 countries have two slab tax modules and all others have modified and tweaked the GST structure to align it to their country-specific needs, which essentially means there is no need to follow the ‘All size fits one’ approach.
In fact, the seamless GST implementation by the Modi government is a glowing tribute to what political conviction of courage can achieve. Under GST, Central Excise duty, Additional Excise duty, Service Tax and additional duty of customs (equivalent to excise), State VAT, entertainment tax, taxes on lotteries, betting and gambling, and entry tax (not levied by local bodies) have been subsumed within GST. Other taxes subsumed are Octroi, entry tax and luxury tax, thus making it a single indirect tax in India.
The GST structure is fairly simple with Integrated GST (IGST), which deals with the inter-state sale, has revenues being collected and shared by both states and the Centre. SGST and CGST dealing with intra-state sales have revenues being collected by the states in the case of SGST and Centre in the case of CGST. Of course, there is the UTGST too for the Union Territories.
An e-Way Bill which is an electronic permit for shipping goods similar to a waybill is now mandatory for inter-state transport of goods effective from 1st April 2018, under the GST regime. It is required to be generated for every interstate movement of goods beyond 10 kilometres with the threshold limit being Rs. 50,000. It is a paperless technology solution and critical anti-evasion tool to check tax leakages and helps in clamping down on trade that happens on a cash-basis beyond a certain limit. Along with GST, the e-Way bill that saw 24 lakh taxpayers and 30,000 transporters registering for it as on September 30, 2018, has been a gigantic step in the right direction in improving tax compliance. All taxpayer services, such as registrations, returns, payments etc. are now available online.
Congress president Rahul Gandhi and his coterie of sycophants can keep vacillating between false bravado and sheer desperation at what they could have done with GST. But finally, an idea is only as good as its implementation. So while the Congress built castles in the air by sitting on the Kelkar committee recommendations for almost ten long years, kudos to the Modi government that it walked the talk and sorted out thorny issues and also made the necessary alterations that eventually made GST a reality on July 1, 2017.
Hence, it is time for the Congress to stop playing the ‘martyr’, and churlishly blaming the BJP for ‘snatching’ their idea — which never was their idea in any case, to start with. In a democracy, an idea is worth its weight in gold only if executed effectively — and it is indeed no mean achievement that for three months in a row, GST collections have been over Rs 1 lakh crore in March, April and May 2019, with an average run rate of well over Rs. 97,000 crores in 2018-19, versus a monthly average of Rs. 89,885 crore in the financial year 2017-18.
Since its inception, monthly GST collection has never fallen below Rs. 83,000 crores, with even the lowest figure being solid Rs 83,716 crores in November 2017.
The best thing about the GST is that there are no hidden taxes — what you see is what you get. Efficiency gains and prevention of leakages will bring down the overall tax burden for consumers, particularly the middle class by preventing the cascading effects of multiple taxations. For businesses, the biggest benefit is uniformity in tax rates throughout the country, which will not only enhance ease of doing business but also make doing business within the country tax neutral, irrespective of the choice of place of doing business in any part of the country. To give relief to smaller businesses, the RCM or Reverse Charge Mechanism where the receiver pays tax and collects the ITC, Input Tax Credit, on behalf of unregistered dealers or suppliers, has been postponed to September 2019.
To further help businesses, the threshold for quarterly return-filing and monthly tax payments was raised in 2018, from an earlier limit of an annual turnover Rs. 1.5 crore to an annual turnover of Rs. 5 crores. This move benefitted 93% of registered GST taxpayers as only 7% of businesses had to file monthly returns. To additionally ease matters, by June 30, 2019, for the preceding financial year, only a consolidated GSTR-9 for regular, individual taxpayers would have to be filed by those already filing GSTR1 and GSTR-3B.GSTR-9A for composite taxpayers, GSTR-9B for e-commerce operators who have filed GSTR-8 earlier and GSTR-9C for those with an annual turnover exceeding Rs. 2 crores along with a copy of reconciliation of audited accounts, would need to be filed.
If demonetisation has been a game-changer, the GST is a transformational tax reform that will boost ‘Make in India’ by bolstering India’s competitiveness, both locally, and in export markets. This, in turn, will have a salubrious impact on virtually every economic parameter. GST is largely pro-poor and pro-middle class and this is amply evident from the fact that items of daily use, from milk, curd, eggs, fish, chicken and flour, to rotis, milk powder, tea, coffee, medicines, frozen vegetables, LPG, biogas, stents, kerosene, sanitary napkins and eating out in both AC and non-AC restaurants are charged either at 0% or 5% tax.
After cutting rates on 29 goods and 53 services in January 2018, by July 2018, the GST Council had pruned the 28% slab by cutting tax rates on 191 goods leaving just 35 items including AC, digital camera, video recorders, dishwashing machines and automobiles in the highest tax bracket, whereas there were around 226 goods in the 28% category when (GST) was implemented on July 1, 2017.
No wonder, therefore, that all 334 commodities which had an effective statutory tax rate of between 26.5% and 31% pre-GST, have witnessed a sharp tax reduction post GST and are now taxed at sub-18%, further vindicating the Modi government’s contention that the growth in tax collections in India under a BJP-led government is the result, not of higher tax rates, but a wider tax base and better tax compliance which was sorely missing in the last decade from 2004 to 2014, under a Congress-led UPA dispensation.
The 31st GST Council meeting on December 22, 2018 made sweeping changes, post which, barring tobacco products, luxury vehicles, molasses, air conditioners, aerated water, large TVs and dishwashers, almost all items have been transferred from the 28% slab to the 18% and 12% slabs with effect from January 1, 2019. Only 28 luxury or “sin” goods will remain in the highest 28% bracket. This is a significant move as it broadly implies that 183 goods will be in the 0% category, 308 taxed at 5%, 178 in the 12% and, 517 goods in the 18% bracket. Even GST on third party insurance premium for vehicles carrying goods was lowered from 28% to 18%. Subsequently, on January 10, 2018, at the 32nd GST Council meeting, the Modi government went even further ahead and raised the exemption threshold for businesses in the country from Rs 20 lakh to Rs 40 lakh, and for businesses specifically in the northeast and hilly states, to Rs 20 lakh from Rs 10 lakh. The threshold for those under the ‘Composition scheme’ was raised from Rs 1 crore to Rs 1.5 crore, with the added relief that such entities will have to pay a fixed GST rate as a percentage of overall sales, by filing returns only once a year.
Again, at the 33rd GST Council meeting on February 24 2019, the Modi government reduced GST on under-construction houses from 12% to 5%, and in the ‘affordable housing’ segment, it was reduced from 8% to a mere 1% — once again endorsing the pro-people approach of the BJP-led NDA government.
Naysayers who had predicted that GST would be inflationary in its initial years have had to eat humble pie, with average retail inflation in 2017-18 and 2018-19, averaging at well below 4%. From a pre-GST tax rate of largely between 28-31%, and in some cases, even an entertainment tax rate of as high as 110%, post-the Modi government’s path-breaking GST, 1186 goods (97.69% of the total 1214 goods) that are widely used, are now taxed at 18% or below.
That clearly has to be the biggest pro-middle class friendly move, ever, by any government in post-independence India.
Efficiency gains, higher compliance, prevention of tax leakages, lower rates, wider base, export friendliness and tax neutrality, all have brought down the overall tax burden for consumers and enhanced the ease of doing business, besides of course making India’s fuel economy more competitive by eliminating the need for truckers to wait endlessly to pay octroi and entry taxes at inter-state check posts.
In November 2017, at its 23rd meeting in Guwahati, the GST Council reduced rates for all AC and non-AC restaurants from 18 to 5%, bringing good cheer all around with only starred restaurants, with a tariff of Rs 7,500 or more, to henceforth charge 18%. At its 31st meeting on December 22, 2018, the GST Council, among other concessions which included cutting rates on 23 items, made services rendered to the 34 crore odd Jan Dhan accounts in the country, completely tax-exempt, showcasing that the Modi government’s clarion call of “Sabka Saath Sabka Vikaas, Sabka Vishwaas” is not a mere platitude but a work ethic that it truly abides by.
It is to the Modi government’s credit that by putting in place an optimal tax slab structure, the GST experience in India has very deftly avoided the pitfalls of the famous ‘Laffer Curve’.
The GST structure chooses to tax demerit goods at the highest rate to dis-incentivise “sin goods” while keeping tax rates for items of mass consumption at zero or 5%. The GST model, under the Modi government, strikes just the right balance between the tax base and tax rates, thereby preventing the tax structure from becoming regressive. For once, Modinomics has trumped the traditional Laffer curve propagandists, by relying less on greed and more on an enabling environment that facilitates higher tax compliance.
To conclude, whether GST will add 2% or 4% more to India’s gross domestic product in the medium-term is not a matter of debate anymore. That is a given.
After all, after being set up in September 2016, the GST Council, within barely two years, took 918 decisions pertaining to GST laws, rules, tax slabs, compensation and threshold rates, of which 96% were executed via 294 notifications. Indeed, what matters going forward is that, with this masterstroke reform, the government has given wings to its agenda of “Ek Bharat, Shrestha Bharat” — not a mere euphuism but professional ethics that the Modi government abides by, both in letter and spirit.