Why we should be patient with GST

Moving forward there will be tweaking of both rates and items as the reform process matures.

 |  4-minute read |   01-07-2017
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This is a case from 1985, when the Supreme Court had to adjudicate whether coconut was fruit or vegetable. There are other such cases involving lemons, betel leaves, turmeric and ginger. Some slightly dated numbers — 1,36,365 indirect tax dispute cases are pending, 40,967 before the Supreme Court.

Litigation occurs because of various reasons; differences in rates across items, as for fruits and vegetables, being one. Think of the indirect tax structure, defined as types of tax — service tax, basic customs duty, countervailing duty (CVD), excise duty, central sales tax (CST), sales tax/ VAT, entertainment tax, luxury tax, entry tax, taxes on betting/gambling, stamp duty.

Think of rate variations within each type. Think of multiple forms. Think of varying templates for returns across states. Think of tax arbitrage between states. Think of inter-state check-posts where trucks wait.

Evidently, a truck takes 8-10 hours to clear a check-post and 16 per cent of a truck’s time is spent waiting at check-posts. (Check-posts aren’t only because of taxes, but taxes are the main culprit.) Everyone should want a cleaner system. A single tax, a single rate, a unified and harmonised structure, with goods and services integrated.

With a broader perspective, and not the narrow GST lens, indirect tax reforms started long ago. VAT was first suggested in 1974 (LK Jha), then again in 1991 (Raja Chelliah). As finance minister, Manmohan Singh harmonised import duties.

As finance minister, Yashwant Sinha harmonised domestic indirect taxes and brought in VAT. In 2000, the PM’s Economic Advisory Council recommended GST. Let’s not forget the then (2000) Empowered Committee of State Finance Ministers (Asim Dasgupta) and 12th (C Rangarajan) and 13th Finance Commission (Vijay Kelkar).

Let’s not forget GST finding a mention in the 2006-07 Union Budget. As finance minister, P Chidambaram set a deadline of April 1, 2010, for GST. The First Discussion Paper on GST was released by the Empowered Committee in 2009. Hence, the GST structure has been known since 2009. Computerisation of commercial taxes, foundation for GST, started in 2010. Before being referred to the Standing Committee, the GST Bill was placed before Parliament in 2011.


As finance minister, Chidambaram started consultations with states in 2012, with a new deadline of December 2012. Revenue compensation to states was ensured in 2013. There are people, including from trade and industry, who argue there haven’t been sufficient consultations and the July 1 deadline must be postponed.

I have mentioned the historical timeline to illustrate how disingenuous such comments are. Every system has inertia and every status quo has beneficiaries. An argument that reforms are painless is nonsense. It is no different for GST. Think of a manufacturer with annual turnover between Rs 20 lakh and Rs 1.5 crore. Why should such an enterprise be happy with the mandatory GST registration required now?

Earlier, the enterprise was outside the tax base. Let’s not beat around the bush. This isn’t only about higher compliance costs or threat of the inspector raj. It is also about tax evasion becoming more difficult. GST is more efficient because it unifies, standardises and harmonises.

Because I get credit for taxes paid in earlier stages of the value chain, it also prevents what economists call cost-cascading effects. At each stage, I only pay tax on the value added bit. Today, nor does a consumer know the extent of taxation on any good or service.

GST makes this transparent. That’s the reason many countries have moved towards GST. A figure floats around: 160 countries in the world have implemented GST. That’s not true: 160 countries have VAT/GST. VAT is a step towards GST, but VAT isn’t GST.

I don’t have a ready number of countries with GST. I can think of Canada, EU, Brazil, UK, Singapore, Malaysia, Australia, and Morocco. The US doesn’t have GST. Introducing GST isn’t easy. But a few additional points. First, this is a beginning and there will be tweaking (of both rates and items) as one goes along.

Alternatively, one could have waited for another 17 years (counting from 2000) for consensus. However, because of exemptions (0 per cent rate) and items kept out, this isn’t GST. It is selective GST.

Second, there is a mindset. Should indirect tax policy be used for distribution concerns? I think distributional issues should be addressed through non-tax instruments or direct taxes. Third, we don’t know what the “average” GST rate is, with these proposed rates. I suspect it will be lower than 18 per cent, probably more like 17 per cent. This is supposed to be revenue neutral.

Fourth, you will read about 1.5 to 2 per cent increase in GDP growth because of GST. This is based on a model that assumed no exemptions and a single rate. We are nowhere near that. GST is a process and on July 1, 2017, we just started. It will take more than 10 years to complete the journey.

(Courtesy of Mail Today)

Also read: GST: Why government has made it so complicated


Bibek Debroy Bibek Debroy @bibekdebroy

The writer is Member, NITI Aayog.

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