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Mainstream, VOL LV No 43 New Delhi October 14, 2017

The GST Syndrome

Saturday 14 October 2017

by Atanu Sengupta and Sanjoy De

1. Introduction

The Goods and Services Tax (GST) is nothing new. It has been in the air since the 2000s or even earlier. The singularity of the present situation is the ruthlessness and speed at which it has been implemented, reflecting an aura of supposed efficiency and alacrity. The implementation was done without addressing and perhaps in spite of a lot of controversies accompanying its execution.

As always, a plethora of views have emerged in this field. There are some who vehemently support this alacrity regarding it as a sign of the government’s alertness and the promptness of action. Some others might accept the concept of the GST but are against its present form. There are a few who vie against these views taking the notion of the GST acting as a noose. We are, however, not ardent believers of any pre-assigned thought. Hence, it is necessary to understand not only the process of the GST implementation but also the very notion of the GST.

2. The Theoretical Lagoons for GST

Ideally, the GST system is supposed to replace the baffling array of indirect taxes levied by the Central and the State governments in the federal structure with a unified and simplified tax structure. The present form of the GST structure, though a bit convoluted, resembles the idea of optimal taxation proposed by Diamond and Mirrlees (1971, 1976).

The essence of these scholarly papers is that an optimal tax system should not take the production of intermediate goods in the ambit of taxation. The underlying logic is that taxation of intermediate goods siphons resources away from the production of end goods. They concluded that the burden of taxation should fall on income or consumption so as to enhance the level of efficiency. In theory, the GST proposes tax on final consumption instead of tax paid across the production chain and is in conformity with the Diamond-Mirrlees principle of optimum taxation.

In India, it took nearly seven decades after independence to introduce the current form of GST structure. Prior to this, Central Value Added Taxes (CENVAT) and Value Added Taxes (VAT) at the State level were in vogue. Before the introduction of the VAT system, the pre-existing Central excise duty and the State sales tax systems were fraught with the problem of multiple taxation. In that system, first the inputs used in production were taxed. Thereafter, the output, containing the input tax-load, was taxed again. This was causing the problem of ‘tax on tax’. Eventually, this was escalating the cost of production and resulting in higher prices of goods and services, to the detriment of the producers, sellers as well as buyers. Also, the system led to the existence of numerous sales taxes, different tax rates for the same commodity in different States and unhealthy competition among States in terms of sales tax rates.

In order to remedy the problem of multiple taxation, the VAT system was introduced both at the Central and State levels. The VAT system eliminated the chance of multiple taxation by providing a mechanism of “set off” for tax paid on intermediate goods and was undoubtedly an improvement over the previous indirect tax regime.1

Despite some discernible success, both the CENVAT and the State VAT systems have some loopholes. First, only the Central Excise Duty was taken under the purview of CENVAT. But, several important Central Taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges were not included in CENVAT and so were not given the benefits of set-offs. The Empowered Committee of State Finance Ministers, 2009 recommended to include all the above discussed taxes in value added taxes. Secondly, another drawback of CENVAT is that it is limited to the stage of production. The scope of CENVAT should be broadened to capture value addition at each stage of distributive trade.

Similarly, at the State-level VAT also, there was some incompleteness. Firstly, there were some taxes in the States, such as Luxury Tax, Entertainment Tax, etc., which were not subsumed in VAT. Secondly, service taxes were not included in VAT. The report of the Finance Ministers proposed to bring a constitutional amendment to empower States to collect service tax.

Also, the report recommended that businesses with annual turnover of less than Rs 20 lakhs should not come under the purview of the GST. Also, the committee recommended that organi-sations with an annual turnover of less than Rs 75 lakhs should be allowed to pay a small part of their turnover as simplified tax.

In a nutshell, ideally, “GST is not simply VAT plus service tax, but a major improvement over the previous system of VAT and disjointed services tax—a justified step forward.”2

3. GST in Its Recent Avatar—Ideals and Realisations

Though the GST is the next logical advancement of the pre-existing VAT system, the actually implemented GST system is not exactly identical to the GST structure proposed by the the Empowered Committee of State Finance Ministers, 2009.

First of all, the committee proposed three tax rates—zero per cent, five per cent and 12-14.5 per cent; however, the present GST structure has five GST rates of zero per cent, five per cent, 12 per cent, 18 per cent and 28 per cent. This is certainly not in sync with the ideal GST structure that advocates a more unified and simplified tax structure. There is scope for consolidating the GST rates to improve the present structure and make it simpler. Moreover, the present highest tax slab of 28 per cent is nearly double the highest GST rate proposed by the committee, and is exorbitantly high in comparison to global standards.

Secondly, apart from the exempted list and a special rate for gold, silver and precious metals, the GST framework 2009 proposed only two GST rates—a lower rate for necessary commodities, all the industrial and agricultural inputs and a general floor rate, but with a band to make it a bit flexible. The committee recommended a floor rate and a band around that rate to uphold the autonomy of the States in choosing the rates. However, the current GST structure has not given much importance to this vital issue, pertaining to the autonomy of the States.

Thirdly, in the VAT system, all life-saving drugs were given exemptions and the lower tax rate of five per cent was applicable for the remaining drugs. Moreover, there were 376 drugs in the essential/ life-saving category. In the new system, not even a single drug has been kept in the exempted category. Additionally, a much lower number of drugs (only 74) has been kept in the life-saving category. Also, for this curtailed list of essential drugs, a GST rate of five per cent has been set. The GST rates for the remaining drugs have been fixed at 12 per cent and 18 per cent. There is plenty of scope to lower down these rates for the benefit of the people in the country.

Finally, a large number of very small businesses have to mandatorily comply with the new GST rule. Even for this set of businessmen, application of computer is required for smooth implementation of the GST system. A large number of these businesses do not own computers since in the earlier VAT regime most of the tax compliance was done through paper formalities.

4. Questioning the Ideal

The main premise of VAT and the GST is the extension of the tax base to make it all-comprehensive. It is here that a few questions crop up. Ray (2012) has sorted out the picture of the economics of solidarity. His argument is that within the broader spectrum of the economy, the poor or the very poor tend to eke out a form of living out of the non-commodified part of the economy. It provides the only survival choice for the people who are left out of the broader spectrum either due to lack of skills or as many skills becoming obsolete. These people form a part of the so-called informal economy that has little to do with the formal structure. They also take little state assistance for their survival. It is this section which is outside the standard tax programme. Obviously, they are of ‘illegal or extra-legal’ existence (unregistered shops, trades in the foot paths or other such public places, skills that have relevance in their commodity-based living and so on).

Bringing them under the universal tax scheme of any name will be a great injustice to them. It will cut their living possibilities without contributing to their existence. The logic of optimal taxation has no chance here. In fashioning any tax scheme, one has to be careful in considering this so-called illegal existence.

A common counter-argument could be that a person gets his/her minimum life sustenance from the state. The state is responsible for maintaining the basic law and order and protection against foreign aggression—the structure within which the individuals can survive and perform. It is thus the prerogative of any individual to pay the tax.

This argument has some basic flaws. Its visualisation of the state is faulty. The state is a result of social contract. (Stiglitz, 2002) In lieu of providing the life essentials to individuals, the individuals, in their turn, have to provide certain obligations and duties often codified in the contract. The payment of tax depends upon the individuals’ ability to pay and hence cannot be a basic code. It is the contention of progressive taxation that tax should be proportional to the income earned, with certain sections completely exempted from it. The idea of the GST as an all-comprehensive tax breaks this basic ethical structure.

5. Conclusion

The new GST is a great departure from the GST originally visualised. In fact, we are doubtful whether we can call this new GST as GST proper or a modified GST. However, the trouble is deeper. The premise of the GST is itself flawed. It is based on the argument of universal taxation—the notion being that everybody who gets benefits from the state, should repay it. In the underdeveloped world, there is a large body of informal existence in the form of ‘solidarity economics’. (Ray 2012) This section is not dependent on the state in any essential way. Trying to formalise them within any strict tax regima is not ethically tenable. However, it may be justified in terms of efficiency.

References

Diamond, P. and James Mirrlees (1971): “Optimal Taxation and Public Production I: Production Efficiency”, American Economic Review, 61, 8-27.

Diamond, Peter and James Mirrlees (1976):”Private Constant Returns and Public Shadow Prices”, Review of Economic Studies, 43, 41-78.

Empowered Committee of State Finance Ministers (2009): “First Discussion Paper on GST”, Government of India, New Delhi.

Ray, Sunil (2012): “Economics of Solidarity”, Economic and Political Weekly, Vol. 47, No. 24, pp 39-48.

Stiglitz, J. E. (2002): Globalisation and its discontents, New York: W.W. Norton.

Endnotes

1. The First Discussion Paper on GST in India by the Empowered Committee of State Ministers says that, “With VAT, the problem of ‘tax on tax’ and related burden of cascading effect is thus removed. Furthermore, since the benefit of set-off can be obtained only if tax is duly paid on inputs (in the case of Central VAT), and on both inputs and on previous purchases (in the case of State VAT), there is a built-in check in the VAT structure on tax compliance in the Centre as well as in the States, with expected results in terms of improvement in transparency and reduction in tax evasion.”

2. This was given in the First Discussion Paper on Goods and Services Tax in India by the Empowered Committee of State Finance Ministers.

Dr Atanu Sengupta is a Professor, Department of Economics, Burdwan University, Burdwan (West Bengal). Sanjoy De is a Research Scholar, Department of Economics, Burdwan University, Burdwan (West Bengal).

ISSN : 0542-1462 / RNI No. : 7064/62