Will GST, set to be rolled out on June 30 midnight, create ‘One nation, One tax’?
Upheaval, uncertainty ahead
GST is being touted as the biggest tax reform in India's economic history, but my personal view is that it is the most terrible thing to happen in the country. Somebody said you cannot stop an idea whose time has come. GST is a horrible idea whose time should not come but unfortunately its time has come. And I don't say this to shock people or dramatise something; I say this out of strong personal conviction.
Why do I say that GST is a bad idea? Let's understand our concepts first. GST is nothing but VAT in most countries. The prime idea is that you don't levy tax on tax from the raw material to the final output stage and you only pay tax on value addition and avoid the cascading effect of taxes. That is the basic thing of the GST. There is only one basic GST throughout the world, except in Canada and Brazil, which I think have two. Most countries have one GST. In Singapore, for instance, whether you go a bar or buy an electronic item, you just pay 7 per cent GST. My fundamental objection to GST is what we are calling GST is not GST.
Look at what's happening now. We have 29 states and so you have 29 VAT, sales tax, service tax, excise duty-that's total of 32. So, what's the status with our GST now? I can understand if you have one GST--one nation, one tax. There are no problems with that. But look at what's going to happen now. After the 101th amendment to the Constitution, we have Article 246, which says Parliament and the States can levy tax on the supply of goods and services. So, not only Parliament but each state can levy its own GST.
So, we are going to have 29 different VAT laws or state S-GSTs. You are going to have one CGST for inter-state transactions and you are going to have one IGST or inter-GST, so you are going to have 31 laws replacing 32 laws now. How does this simplify life for the citizen?
Article 246 says every state can levy a GST. Now we are a federal structure. Dr. Ambedkar said the essence of our Constitution is partition between the law-making power given to the Parliament and law-making power given to the state. The Supreme Court has said state governments are not appendages of the Parliament. And on Dec. 11, 2016, the judgment in the entry tax case says that every state is as sovereign as Parliament in its power to levy taxes. So, there is nothing that stops a state government from going on its own path.
Article 279A introduces GST council whose power is only recommendatory. So, today there is nothing to stop a maverick state government from going on a different path or at least distorting the entire GST system.
Now apart from this horribly complex thing, I am quite amazed at the debate which says GST is panacea for all evils and that it's going to increase GDP by two per cent. What's the basis of these claims? I personally believe the existing system is good. The problem is not with the law but with its implementation and leakages in the system.
I am just reading eminent economist Dr Vijay Joshi's book, 'India's Long Road: the Search for Prosperity'. Dealing with GST, he says, "It would at last make the country a single market, which at present it is manifestly not; and large benefits could be expected from such a change over time. Unfortunately, the politics of all this is not straightforward. A 'grand bargain' between the Centre and the states is necessary to pass the requisite Constitutional amendment. The result promises to be a messy compromise, with too many tax rates and too many exemptions. If this is what happens, a huge opportunity will have been squandered, and the GST will become just a name-changer, not a game-changer".
In a federal nation more diverse than the EU, where there are more differences between Jharkhand and Tamil Nadu than between Spain and Portugal, we have seen that what's good for Chattisgarh is not good for Maharashtra and vice versa. You want to have one kind of GST putting everyone into the same problem, same situation. So, I think it will lead to more complexity, more uncertainty, and procedure is going to be more difficult and I will make good my submission.
Today, a service provider like a diagnostic centre files two service tax returns in a year. Come September, when this wonderful GST dream comes true, this service provider will have to file three returns a month - on the 10th, 15th and 20th - all online. That would be 36 returns in a year. He also has to file 12 TDS returns, plus one annual return. So, mathematically speaking, a person who is filing two service tax returns will have to file 49 returns. This is no exaggeration, please see the fine print. And if the guy has diagnostic centres in nine states, he will be filing 9 x 49 returns because each state is autonomous. Just imagine the load on the system as everything must be online.
I strongly believe that demonetisation has caused tremendous collateral damage. And now I fear that GST is being implemented in a country not yet ready for it. What is the threshold limit? Anybody above `20 lakhs per year comes under GST. What online systems and data support can a service provider at Sholapur or Jaisalmer access for such online operations? My suggestion would be GST could be tried on trial basis on three manufacturing units, three service sectors and three traders to check out problems and evolve solutions. I strongly believe India is not suited for national GST but then the disaster is all set to happen.
The other fear I have on GST concerns the enormous potential for tax evasion. A unique feature of GST throughout the world is that there's only one rate of tax in a country. In Singapore you don't have 7 per cent on shoes, 12 per cent on jewelry and 40 per cent on liquor, but just one GST - 7 per cent flat. But what are rates you are talking of - 5 %, 7 %, 12 %, 18 % and 28%.
Whatever our virtues are, paying taxes is not one of them. The entire economy is basically cash and you can well imagine the magnitude of tax evasion. What happened in a system that levied 110 per cent duty for the manufacturer of shampoo and nil duty on those who made khadigram soap? And there's no duty if the turnover is less than Rs 5 lakhs and it's 110 per cent duty for turnover over Rs 5 lakh and up to Rs 50 lakh. People set up shampoo units at home and showed turnover of only Rs 5 lakh. If you have Rs 20 lakhs as threshold, there will be mushrooming of enterprises.
Toxic taxes are the worst thing for investment climate, which should actually be fertile to nurture growth and encourage young people to come forward and start businesses. The reality is that while the slogan on the big banner screams, 'Make in India', our taxes say Quit India.
In my opinion, there were only three budgets which were really reformative in terms of taxation. One was C. Subramaniam's budget in 1975 that brought the tax down from 97 % to 75 %. The best budget was by V. P. Singh and the next was Manmohan Singh budget in 1991 where they understood that taxes are a byproduct of growth.
GST is a great step by Team India, great step towards transformation. This can't be seen as a victory of a party or government, it is a win for the democratic ethos of India. We say a lot about corruption but to eradicate corruption it is important to strengthen our system as well.
– Narendra Modi, Prime minister
“I congratulate Mr Arun Jaitley (finance minister) and the government for being in power when the bills are passed. It is not a perfect GST. In a political economy, it is difficult and undesirable to have one tax rate. This is a moment for collective celebration.
– Jairam Ramesh, Congress leader
GST is completely technology-driven. it will help eradicate corruption from the grassroots level and transportation time for goods will be reduced by 50 per cent.
– NIRMALA SITHARAMAN, Union minister of state for commerce and industry
There are several issues the traders have raised. that's why we (DMK) wanted the TNGST bill to be referred to a select committee of the assembly. but the government declined.
– M. K. Stalin, leader of Oppn in TN
(Arvind P. Datar is among the top tax and corporate lawyers in India)