Modi must introduce radical changes to GST
The three-month delay in the implementation of India’s most significant tax reform could well turn into a blessing in disguise.
While the government is desperately looking for Budget balm after the note ban pain, the most effective pain killer is already with Prime Minister Narendra Modi. Instead of looking for a cure in “the old shops” of subsidies to poor or income tax concessions, all that he needs to do is radically change the course of the proposed Goods and Services Tax (GST).
Not only can the GST double the pain of demonetisation if implemented in its present form, it can also increase the curse of black money in newer ways.
The GST architects are well-aware of the concerns of the key stakeholders. The proposed tax has the potential to heal the note ban wounds provided it is turned into a revolutionary reform.
A good GST can bring back demand and create a feel-good factor among apprehensive investors besides being a cure for the malaise of black money, which has continued even after the demonetisation drive.
In India, consumption is heavily taxed. Apart from excise, service tax and VAT, there is a plethora of taxes levied on commodities under different rates.
A large part of the black money is generated by the avoidance of taxes (excise and VAT) on trade or consumption. Traders do prefer to pay taxes, but the burden of tax shrinks their profit margin in addition to the exorbitantly high cost (credit, energy, infrastructure, compliance) of doing business, which leads to tax theft.
A multi-level taxation is the major cause behind inflation and compressed consumption.
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| Not only can the GST double the pain of demonetisation if implemented in its present form, it can also increase the curse of black money in newer ways. [Photo: Indiatoday.in] |
The GST is being brought in as a panacea to obliterate all these ills. However, the tax structure cleared by the GST council has five rates – zero per cent, five per cent, 12 per cent, 18 per cent and 28 per cent) - and across three levels - Centre, state and inter-state.
Over and above this, the central government will impose cess to finance proposed compensation package to states against the possible revenue loss on account of GST implementation.
In recent meetings of the GST council, the state governments have also expressed intention to impose their own cess.
With multiple rates and open-ended cess raj, GST is unlikely to become a game changer, and would remain more or less similar to the present structure.
Under GST, producers and sellers will get back the tax paid on inputs (raw material and services) to protect the consumer from the burden of multiple taxes. Still, the multi-rate GST will severely complicate input credit and emerge as a hurdle for medium and small businesses.
How then can the GST become a game changer amid troubles triggered by the note ban?
1) Two tax rates instead of three or four without any cess and additional tax over and above. Just one rate for general consumption goods, production and services, and another for luxury goods will make GST truly radical. These rates can be 12 per cent and 18 per cent.
2) Also, the GST must end all kinds of concessions. There should be no exemption limit on turnover, nor any special concession to any industry or state.
3) The GST must ensure a compulsory registration and tax payment for each business, the way Aadhar is essential for every citizen.
4) These ideas may sound radical, but not as sweeping as the demonetisation, which ended with no tangible gains. Changes in GST are still possible because the law has not yet reached Parliament.
If India gets a truly revolutionary GST, it can offset the following side-effects of note ban:
1) The note ban has shattered consumption and demand. The present form of GST will not help reduce the tax burden significantly nor will it boost demand.
However, a GST with only two rates will make production and services substantially cheaper. It can give a new strength to demand by regulating inflation. We need not reiterate that high taxes cause tax thievery, corruption and generation of black money.
2) Under the proposed GST, businesses will have to obtain at least 30 registrations. They will be liable to file 30 returns on monthly to annual basis. This will definitely give a sharp boost to compliance cost for enterprises. A good and simple GST will save them from a plethora of returns and registrations.
Through compulsory registration for all business persons, every kind of production, distribution and consumption can be brought to the notice of the tax authority.
This will help ensure a clean business to monitor every taxable business transaction.
3) Lower taxes, no exemptions and low-cost of compliance always come with a guarantee of better revenue.
4) Lesser taxes, high demand and ease of doing business are all that investors require to make a comeback after the note ban shocker.
Common people have suffered a lot due to note ban. Now the government must atone itself and make sacrifices to make GST a truly landmark reform.
The governments will have to shun squeezing consumption by imposing various taxes. The GST has to be bold enough to cut down its expenditure and privatisation of PSUs to generate more funds from within.
Only history will tell whether Prime Minister Modi has chosen the right policy goals. However, between GST and note ban, one comes to the conclusion that instead of making GST revolutionary, the government has chosen the anti-growth path of demonetisation.
GST with low taxes can bring in transparency in businesses, which is the first step towards nipping the generation of black money in the bud. The rest of the job could be done by fixing limits on cash transactions, compulsory identification for buying land and gold, introducing accounting reforms and transparency in political contributions.
The GST needs radical leadership from the prime minister’s end. If he is able to build an easy and less inflationary tax system, not only will it be India’s greatest reform after economic liberalisation, but also a bigger and far-reaching transformation than demonetisation.