Criticisms of proposed GST are mostly wrong

All GSTs in federal countries all over the world are imperfect

When the 122nd amendment Bill for amendment of the Constitution is due for discussion in Parliament, it is but natural that there will be criticism and appraisal of the proposed model. I am writing here to say that the criticism should not be unfair. I shall discuss which are the unfair criticisms and which have some validity.

One of the most unfair criticisms is that the proposed model is not ideal and is fractured due to compromises made mostly under the pressure of the states. What is not remembered is that all kinds of goods and services tax (GSTs) in federal countries all over the world are imperfect. Brazil's GST is so complicated that economists have called it a patchwork quilt. In European Union also the structure is defective such that in poorer countries like Italy and Spain, etc, there is a lot of cash sale. Even in Canada, each state collects it own sales tax apart from the central levy of seven per cent. In India, we have been able to subsume the sales tax, which is a better model than in Canada.

The exclusion of petroleum, liquor and tobacco, which accounts for nearly 40 per cent of total revenue, has been a point of criticism. However, it is to be understood that the share of revenue on petroleum may be high, but to judge the impact on the GST on the basis of just share of revenue is to miss the macroeconomic picture. Petroleum is a bulk commodity and is also traded in bulk. So the impact of non-inclusion of petroleum does not adversely affect the creation of a common market for the general merchandise, like raw materials and machines. Moreover, there can be a proper system of value-added tax (VAT) at state level and CENVAT at the central level for petroleum and tobacco, which will solve the problem of input credit. No great harm is done if parallel VAT runs with GST. For alcohol, tobacco and mineral oil, even in the European Union, there is excise in addition to VAT with different rates in different countries. Saying that GST without petroleum is not GST at all, is just over reaction.

Another criticism is that the present model does not include real estate. This point is entirely without merit. Real estate does not fall in the definition of goods and services. There will have to be many amendments of Constitutional provisions if it is to be included, namely Entries 63, 54,18 and 19 of State List and Entry 84 of Union List. This will bring about tremendous strife between Centre and the states . It is now prevalent only in Canada, Australia, New Zealand and Singapore.

The real defects in the model are the following.

(a) There is a retrograde move to extend GST to stock transfer by first charging on it and then giving credit. The states have forced their way in this decision which will cause a lot of impairment in work against the wishes of the Centre. It will involve tremendous work with no revenue gain. Even if certain amounts are given credit after initial payment of duty, the money has to be brought out from other circulations and to that extent the economy will become slower.

(b) On import, a countervailing (CV) duty of 27 per cent, which is said to be revenue neutral rate for IGST, is to be paid which is substantially higher than before. Earlier, service tax was not to be included in CV duty, but now that also is included in the IGST (integrated GST). Charging such higher duty is economically regressive. Government may have to lower the whole rate for countervailing duty which has not been indicated.

Conclusion is that most of the criticisms do not take into account the reality of federalism. They do not count the blessings which are the following:

One rate of tax, no distinction between goods and services, common market, no entry tax, common exemptions, comprehensive nature of tax, demise of the concept of manufacture, no more of that fat book called excise tariff, no classification controversy, no central sales tax which will increase inter-state trade, simpler invoicing, etc. We should now try to remove the defects rather than trying to include what has not been included.
Smukher2000@yahoo.com