Who derailed GST and how
Has Indian polity evolved enough to deliver on the aspirations of a globally integrated economy? Is our policymaking process pragmatic and innovative? Going by the Goods and Services Tax, the answer would, regrettably, be a straight no.
If the GST is an illustration of India's new cooperative federalism, it is indeed a very disappointing debut. The structure of GST confirms that Indian polity could be anything but radical. The extreme conservatism of Indian politicians coupled with the reluctance to take risks and archaic ideas of taxation have turned GST into a non-reform.
The GST had been designed with the idea to unleash ease of doing business with a low incidence of indirect taxation and a minimum number of tax slabs. The idea of having lower taxation and better compliance was destined to generate higher revenues, yet timid state governments took advantage of the desperate and reform-challenged Centre to transform GST into an insipid and complicated project to protect their revenues.
What is more worrying is the fact that Indian polity eventually failed to deliver a radical reform despite having a highly popular PM leading a stable government with BJP’s rule in several states.
Conservative federalism
GST was not conceived as a revenue enhancement measure at the outset. The idea of merging several taxes (Centre and state) into one, introduction of input tax credit (the refund of tax included in cost) and creation of a common national market had been mooted with the premise that central and state governments will adjust their fiscal set-up to make space for a genuine low indirect tax regime to reap the benefit of Laffer's Curve (lower tax-high consumption-high revenues) in due course of time.
However, the premise of GST was entirely altered when it came to the political palate. State governments forced Centre to provide them with an insurance cover (compensation package) against any possible revenue losses on account of GST. The government then went ahead with imposing higher tax rates and a series of cess to finance the compensation the state governments demanded for five years after the implementation of GST.
The bias towards protecting revenues compelled the GST Council to work out dealmakers, which were contrary to the hopes of having a low and simple taxation under the GST regime.
Dicey dealmakers
- States forced the GST Council to place 60 per cent of products under the revenue neutral rate of 18 per cent to ensure that the revenue they receive remained unchanged despite changes in tax structure.
- States also compelled the GST Council to set 14 per cent revenue growth as uniform and secular growth rate for all states while computing compensation. This means that states' own revenues, subsumed into the GST, would grow by at least 14 per cent (double the growth rate of the GDP!) for the first five years after the transition to GST.
- The revenue obsession also guided the status of energy under GST. States and the Centre connived to keep petro products and electricity under the ambit of GST in order to protect their revenues. Energy is an essential cost to economic activity. However, industry and trade won't be allowed to claim refund on tax paid on energy used as input in their business.
- Last but not the least, thanks to the fear of losing revenue, taxes on land and real estate have also been excluded from GST. Needless to say that land is a fundamental economic resource for any productive occupation.
Enter complications
- States' unprecedented bias towards revenues set the ball rolling for higher taxation for most products. Subsequent to the formula of placing 60 per cent products under the bracket of 18 per cent, the Centre also slapped 28 per cent tax on aspirational consumption along with a cess over it.
- Placing services under four-rate slabs is also a result of the same revenue obsession.
- The GST Council has almost removed the revenue risk from GST by keeping 80 per cent products and services under 18 per cent and 28 per cent tax brackets, coupled with a generous compensation package in the backend.
- However, the formula of putting 80 per cent of products and services under higher tax slabs was inflationary and politically risky; therefore, the slabs of 5-12 per cent were introduced for a handful of mass consumables to reduce the risk of inflation.
All this has resulted in three-layered (CGST-SGST-IGST) and multiple (eight rates) GSTs against the promise of one nation, one tax. With an introduction to the notorious and abhorred multi-tiered slabs structure, GST's worst fears are coming true. India is a rapidly changing economy where innovation in products and services is an obvious practice. This structure will create numerous classification issues for them.
Small taxpayers are bound to suffer the most under GST, which is coming up with the complexities of multiple classifications. The cost of compliance with the new tax rules will be higher than before. No wonder, if a good number of small and medium assesses fail to avail input tax credit because of the difficulties involved in the new system. Further, this structure is more likely to increase discretionary opportunities for revenue bureaucracy and less likely to encourage compliance.
Show some courage
Is there any hope left for improving the GST further? Yes, if only the GST Council could take the following decisions before the implementation of GST.
- Bring electricity and petro products under GST by 2020 with full tax credit.
- States have to align their land registration charges with one another to bring land and real estate under GST by 2022.
- Roadmap for two-rate GST by 2022.
These goals must be achieved before 2022, i.e. the expiry of the five-year compensation plan for states.
The enthusiasm around GST hinged upon the premise that this reform can boost GDP growth by 2 per cent. The GDP booster was supposed to come from consumption, demand, investment and business, unlike the current structure which is feeding the outdated whims of leaders and bureaucracy.
The postscript dissent of TMC and AAP is just theatrics. The fact of the matter is that the politicians of states and the Centre have not taken any radical step and have just enforced a non-reform, which may well turn into an anti-reform if implemented shabbily.