It is more than two months since the roll-out of the Goods and Services tax (GST) on July 1. Apart from the initial glitches and confusion on expected lines, the transition from indirect taxes to GST regime has so far been fairly smooth. The start has been promising: the goods and services tax revenue has seen a good opening. The collections at Rs. 92,283 crore in July from 64 per cent of tax payer base surpassed the government’s estimates and have dispelled the initial worry that GST could aggravate fiscal deficit of the Centre and state governments because of transition glitches. But these are early days yet and it remains to be seen whether the Centre would be left with enough resources to compensate state governments for their revenue loss for five years, while keeping its own deficit under control.
While the full impact of the new tax regime on businesses, economy and growth will be seen over the next few quarters, in the last two months GST has been one of the most hotly debated topics in political and economic forums with its share of criticism and admiration. Though the consensus is that GST is a ‘historic’ and landmark step in post-independent India, it has been criticised on many counts as a flawed reform and a complex maze, both in terms of tax slabs, rates and effective compliance and implementation. Lost in the spectacle of the government’s self-congratulation of citing GST as the ‘biggest reform since independence’ is the perspective on GST as part of a broader taxation policy. There are no two opinions that GST is indeed an important and major tax reform, which will re-shape India’s business landscape.
Over medium to long term, GST will also lead to better tax compliance, expansion of the indirect tax net, higher revenues for the central and state governments, while also increasing the size of the economy and having a positive impact on GDP. The major outcome of GST would be the unification of Indian economy estimated at $ 2 trillion into a single market. Though commendable in intent and scale, it is however a somewhat complex maze that’s still lacks clarity and hence has caused confusion to small and medium businesses. Incidentally, the GST council is still in the process of re-looking at tax rates for goods and services and has revised rates for many products. However, all said and done, GST in its present form is quite different from what was originally intentioned or proposed: a single flat rate for all goods and services.
If one looks at India’s tax to GDP ratio, at 18 per cent it compares pathetically with developed countries where tax to GDP ratio ranges between 30 to 40 per cent. Even in comparable economies like Brazil and South Africa, the ratio is between 23 and 26 per cent. What is equally worse is the extremely high share of indirect taxes in percentage terms of the total taxes collected in India: almost two-thirds come from indirect taxes (GST is an indirect tax) and only one-third from direct taxes like income and company profits. This is in sharp contrast with other countries where the share of indirect and direct taxes is in reverse proportion. This is partly because of tax psychology that works in favour of avoiding taxes in India, whether direct or indirect. GST however, does not change the psychology of tax payer in any significant way.
Apart from classification of goods in various tax slabs which in some cases defy logic – like gold, for instance, which is a fully imported item but attracts only 3 per cent GST, while notebooks are at 12 per cent – the breaking of GST rate into six slabs (0, 5, 12, 18 and 28, plus cess for luxury items) defeats the conventional and originally intentioned idea of GST as ‘one nation one tax’. It also negates the philosophy of taxation which should be based on the principles of equity and simplicity. Ideally, there should have been one flat rate for all goods and services across the country like it is in Singapore (7 per cent) and Malaysia (6 per cent). Even if compromises were needed to be made, GST could have had only three rates – a mean rate, merit rate and a demerit rate. The problem with multiplicity of rates is that – even service tax which had a single rate has been broken into multiple rates – the new system will encounter same old problems and hence will be open to litigation.
The most contentious issue that still remains unresolved the world over is the GST rate. While some countries like Canada have reduced the GST after implementation, some countries have had to increase it after introduction. However, unlike India, most countries have a much higher threshold for GST applicability for businesses; in India is it is only Rs. 20 lakh. Indian GST also excludes some goods like alcohol, electricity, real estate and petroleum and tobacco products from GST. Though this defeats the purpose of the indirect tax reform, it has been done to please state governments which get more than 50 per cent of their revenue from these items. Exclusion of alcohol, real estate and petroleum products is also a fair indicator of the government’s intentions to continue to rely more on indirect taxes to mop up revenue.
Thus what was meant to be a simple tax plan that could have been easily communicated and understood by consumers and businesses, particularly traders and small and medium enterprises is actually a complex maze that will take quite a while to be mastered by everyone. Probably one of the biggest challenges for smooth transition to GST is poor communication infrastructure: poor broadband access and patchy data connectivity. Internet penetration in India is only 33 per cent of the total population; large number of mid-sized cities and small towns lack reliable internet access. This will make compliance with tax requirements under GST for every agent of economic activity in goods and services from the nooks and corners of India a difficult task.
It took 17 years for GST to move from an idea to reality. It is a milestone in India’s reform journey. But in its current form, GST will remain an incomplete reform till India truly become one nation one tax.
(The author of this article is A L I Chougule, an independent Mumbai-based senior journalist)
Source :  The Free Press Journal