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The big GST question: Why should I foot your bill?

Devinder Sharma | Updated on: 14 February 2017, 1:57 IST

One tax

  • India is moving towards a uniform goods and services tax
  • Supporters say GST will reform the country\'s convoluted tax regime
  • Currently there are too many layers in India\'s tax system

One beneficiary

  • A flat GST will make the common man pay more
  • It will lead to an increase in inflation
  • Corporates will benefit the most from the new policy

More in the story

  • What has the GST experience been in other countries
  • What should the government do

Just imagine: my neighbour has been renovating his house for the past few months. He has broken down the edifice - perhaps he thinks it is outdated now - and is using modern architecture, incorporating landscape designing.

I am sure the renovated house will surely look ultra modern, with strong geometric shapes and swanky-looking interiors, and would certainly be far more functional.

But what if my neighbour were to later send me a fat bill to share his construction costs? This is not done, anyone will say. After all, why should I be made to pay for the renovation work my neighbor decides to undertake?

Read: Can't make sense of the GST debate? Here's what you need to know

This is exactly what we are being made to overlook in the entire discussions around the 'path-breaking', 'historical' and 'game changer' Goods and Services Tax (GST).

The 'reforms'

I have heard Finance Minister Arun Jaitley say time and again how GST will be the game changer for India Inc. The GST, which certainly is a tax reform, will replace all existing indirect taxes such as central excise duty, sales tax, value-added tax, luxury tax, service tax, octroi and so on.

It is expected that GST will greatly reduce the cascading effect, as a result of which growth is likely to increase by 0.9-1.7% of gross domestic product (GDP).

I always failed to understand why a cumbersome tax regime has been in operation all these decades. Not only does a plethora of taxes, or as some say tax over tax, add to the cost of a product, but the system merrily allows rampant corruption at every stage of tax collection.

Whatever be the reasons, the reality is that consumers paid the final retail price even if it was on the higher side. The producer had to live with the hassles of a laborious multi-tax regime, whereas the end cost - in the form of a higher price - was always borne by the consumer.

The GST will now provide a hassle-free tax regime for goods producers. Instead of multiple taxes on goods and services at multiple entry points, there will be a single tax to be paid.

Whether it finally increase the growth rate is beside the point. What is more important is that it will create an environment conducive for business.

The brunt

While it makes it easy for business, I fail to understand why the consumer is being made to bear the ultimate cost.

Like the renovation of the neighbour's house in my story, GST is essentially a renovation of the prevailing multi-layered tax regime.

I am sure you will agree that the cost of renovation should be paid by those undertaking the tax reform. If India Inc is the real beneficiary, as we all know they are, they should be asked to pay for it.

Instead, the cost is being very conveniently passed on to gullible consumers.

Read more- Failed tea party: why Govt's been advised to go against promises made on GST

To prepare the consumers to 'absorb' the high GST rate, Jaitley raised the service tax in Budget 2015 from 12.36 to 14 per cent.

We will get to know only at the time of the next Budget in 2016 as to how much money has been extracted from the common man's pocket in 2015-16. Just to give you an idea, service tax alone yielded an additional Rs 50,000 crore in the previous financial year.

If I go by the progressive increase in service tax collections, and knowing that service tax will merge with the single-rate GST, expected at a standard 18 per cent rate, the additional annual burden on the ignorant masses will be around Rs 2.5 lakh crore.

In other words, the entire cost of undertaking GST reforms is to be borne by the consumers. The sole beneficiary - India Inc - gets away without paying anything.

The layers

Since the GST is a single rate, service tax has to be merged with it. This makes economic sense. But this is perhaps also essential to ensure that the existing revenue collections - measured in the form of revenue neutral rate (RNR) - do not fall.

The drop in revenue from the existing multi-layered taxation system is certain. To make up for the shortfall, the best way is to further tax the common man.

A careful perusal of the Report on the Revenue Neutral Rate and Structure of Rate for Goods and Services Tax (GST) submitted by a team headed by Chief Economic Advisor Arvind Subramaniam clearly brings out the deliberate effort to keep a higher rate of collection.

It suggests RNR of 15-15.5%, with a dual rate of taxation at 12% for some goods and a standard 17-18% for the rest. The committee admits that RNR is at best a guess estimate.

It mentions that among the 160 countries that have introduced VAT - and GST is a form of VAT - there are problems. Be in the countries that adopted a single-rate GST or in those with double-rate GST (like the one proposed for India), there are challenges.

Even among large economies with federal structure, such as the European Union, Canada, Australia, Brazil and Indonesia, there are huge problems with implementation.

I am not getting into implementation problems that are likely to appear, but simply look at the additional burden that the common man will come under.

The price

The report states that in a number of economies such as Australia, Canada and New Zealand, the implementation of GST resulted in steep inflation. To say that the rate of increase in prices will later come down, as has been seen in those countries, is nothing but economic jugglery.

Take the prices of pulses. Between June and October, the price of common man's dal zoomed from an average Rs 70/kg to Rs 170-200/kg.

If the current prices have come down to Rs 120/kg, the rate of inflation is certainly lower, considering the base level. But effectively, the prices have gone up from Rs 70 and have now stabilized at Rs 120. Any further increase in dal prices next year will be measured from the base of Rs 120/kg.

Also read: Govt panel accepts most Congress demands. Will the GST bill pass now?

In addition, a higher service tax creates a domino effect. Raising service tax alone is good enough for the price rise that is expected. The report has listed 24 services, including travelling, hospitality, entertainment, insurance, freight, repairs of building and machinery, royalty, professional/consultancy fees, telephone and gifts.

This additional tax burden notwithstanding, the resulting rise in inflation becomes an indirect tax. Therefore practically you get taxed twice.

Petroleum (only in initial years), electricity, real estate and alcohol are outside the ambit of GST. The report estimates that petroleum and alcohol are biggest revenue sources for the states, fetching 29% of overall indirect tax revenue and 41.8% of total revenues of states to be subsumed under GST.

Since GST will have a two tier structure - taxes levied by the Centre (CGST) and those by states (SGST) - the duplicity alone will take away much of the advantage that is being cited. Case in point: how many states raised VAT when the Centre lowered the excise duty on fuel, as Jaitley described in Parliament recently.

The punch

We are being made to believe that there will be a standard slab at a maximum 18%. But the fact that the Finance Minister is not willing to make it a Constitutional limit indicates that the upper limit is still open.

Many experts believe that once the GST rate is fully harmonized, the two rates to be followed would be a low of 12% and a high standard rate of 22%. There can be no denying that the probability for the service tax to be eventually raised to 22% exists. This is the reason why the Government is not willing to cap the upper limit.

There was no hue and cry when the service tax was raised from 12.36 to 14 per cent this year. This was further raised by 0.5 per cent calling it a cess for Swatch Bharat. In such a gradual and phased manner service tax will be raised periodically to enable the consumer to absorb the additional tax burden. Jor ka jhatka dhire se, (buffer the blow) as they say.

What is therefore important is to ensure that the burden of a GST tax reform is not passed on to consumers. This must be explicitly stated in Parliament as well as in the GST Model Law that is being prepared.

The to-do

The only way this can be done is to put a cap on the upper limit of service tax.

Since India is planning to adopt a dual rate policy, my suggestion is to club service tax along with the lowest rate of 12% per cent. The standard rate, which is likely to be 18%, should be flexible, but the lowest slab should never be allowed to be raised beyond 12%.

Expanding the tax base and doing away with numerous tax exemptions to corporates, which is around 2.7% of the GDP, is a sure way to add to tax revenues.

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First published: 19 December 2015, 6:13 IST
Devinder Sharma @Devinder_Sharma

Devinder Sharma is a distinguished food and trade policy analyst and an award-winning Indian journalist, writer, thinker, and researcher.