GST: What to expect from it and what not

The goods and services tax (GST) will surely be a game changer and will bring immense benefit to manufacturers, traders, exporters and others but it will be illusory to expect too much from it. So we should guard against over-expectation. 
 
Much depends on the GST Law and the administrative structure put in place by the GST Council. The basic advantage comes from an amalgamation of nearly one and half dozen (central and state) taxes. So the gains specifically will be the following: (a) The amalgamation will remove the difficulty of paying so many taxes separately; (b) Common market in the absence of CST and Entry Tax; (c) Invoicing will be simpler; (d) No entry tax which means no waiting at the border and quicker movement of goods; (d) Big and fat central excise tariff will go. It has got eight-digit classifications like 44079990, 76069110; (e) Concept of manufacture, which is most litigated, will go; (f) Zero rating will be more comprehensive in a GST design; and (g) For traders, there will be special advantage since CST will go so that the inter-state trade will be cheaper. 
 
At the same time we should not expect too much from GST. 
 
Revenue: It all depends on the revenue-neutral rate that will be fixed. It has now been fixed at 5 per cent, 12 per cent, 18 per cent and 28 per cent. It will be known only after the first year, whether it is revenue-neutral or not. It is very uncertain whether revenue will grow after the first year even if a proper revenue-neutral rate is fixed. The states are apprehensive and are asking for higher compensation whereas the basic points made in the White Paper submitted by the Empowered Committee before State VAT was introduced from April 1, 2005, was that revenue will increase substantially. Those who argue that GST will increase GDP by 1.5 per cent say it will be because of checking of leakage of revenue. Higher collection of tax would mean more investment and more growth in GDP. This is a theoretical expectation but is not supported by actual examples. Many studies on VAT and GST in Western countries, where this system is in force for a long time, have established that VAT is not a money-spinner. Very recently, Italian Prime Minister Mario Monti has requested landlords, plumbers, electricians and small business to stop conducting large transactions in cash. Italy loses more than ^120 billion in unpaid taxes every year. The situation is equally bad in Spain, Greece, Ireland, Portugal, etc. The claim that the consumer will benefit due to less tax burden is illusory. It depends on whether the total tax collection is the same as last year, allowing for yearly growth.
 
Classification controversy: With five rates of duty namely, 0 per cent, five per cent, 12 per cent, 18 per cent and 28 per cent, there will be quite a number of classification controversies between 12 per cent and 18 per cent. If these two rates could be combined into one rate of 16 per cent, all controversies would be practically over.  Distinction between goods and services will not go since a separate rate for service tax is being introduced.
 
Inflation: Inflation will also depend on whether the total tax collection is much higher than the normal expectation.  VAT/GST does not have any particular impact on inflation which is proved by case studies of different countries (Alan A Tait – Value Added Tax, IMF 1988, p.212).
 
Export: Since all countries have resorted to GST, the effects cancel each other in the international market.
 
Anti-profit law: A special worry is that the draft GST law contains at Section 163 (1) the provision that the central government may constitute an anti-profiteering authority. This is a very retrograde step. The Competition Act, 2002 provides for action against abuse of dominant position.  No other anti-profiteering law is necessary. That will ruin the “ease of business”.
 
The conclusion is that the GST will be good for some reasons but expecting too much from it is neither logical nor economically sound. Much of the success will depend on how well the government is able to control evasion and keep the administrative structure free from controversy. It would have been a great GST if the rates 12 per cent and 18 per cent were combined into 16 per cent.

The writer is retired member of the Central Board of Excise & Customs.
E-mail: smukher2000@yahoo.com