Some of the conceptual issues in GST

The concept of taxable event was ratified by the SC four decades ago. Analysts should not confuse GST (VAT) with sales tax

In an earlier article about a year back, I had written about some misconceptions regarding VAT & GST. Now I am writing more on the subject.

(a) The White Paper on VAT issued by the Empowered Committee of State Finance Ministers on November 16, 1999, has stated that the GST has subsumed several central taxes, including Additional Customs Duty, commonly known as countervailing duty (CVD). This is clearly wrong. Countervailing duty has not been subsumed. CVD is not an independent tax but is levied only as equal to Central Excise Duty at that time. Now also Integrated Goods and Service Tax (IGST) is levied under the Customs Act, 1962, read with the Customs Tariff Act and Section 5 of the IGST Act. So, what was CVD has now come in a different name with some change in its character.

(b) Some economists have made statements on the public forum that GST is a sales tax. This is also wrong. It is a value added tax. The difference is that in the case of sales tax, the taxable event is the act of sale. But in the case of GST or VAT, the taxable event is the act of adding value (to the inputs). The concept of taxable event was clarified by the Supreme Court on a reference made by the President to the Supreme Court (Special Reference No.1 of 1962) in Re: Sea Customs Act, 1878, reported in 1964(3) SCR787. The judgement held that “... taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. We may in this connection contrast sales tax which is also imposed with reference to goods sold where the taxable event is the act of sale”. With this concept of taxable event ratified by the Supreme Court four decades ago, analysts should not confuse GST (VAT) with sales tax.
 

(c) It is believed that GST is a neutral tax. A tax is neutral when its imposition does not influence the decision to invest or to take other economic decisions. VAT is not fully neutral but it is certainly more neutral, that is, less distortionary than other taxes. VAT is not neutral between capital and labour, some aspects of neutrality are more ephemeral than real and it is not neutral when it has a multiplicity of rates and exemptions, which is often than not. In the era of fiscal dirigisme, neutrality of tax is precisely the opposite virtue. It is no virtue but a drag in a developing country. Neutrality is more relevant to a developed country than to India, which needs more of fiscal dirigisme than passive neutralism. The US under President Trump has moved furthest from neutrality of tax.

(d) Much is said against sales tax that it leads to cascading effect and so is economically inefficient and undesirable. The fact is that this trait of sales tax is overstated. The only area where cascading makes a real difference is the export sector. But there again, it is not that a cascading tax can continue to remain cascading when it comes to exporting the goods. The taxes charged within the country can very well be rebated and refunded so that the exports are free of taxes. There is nothing inherent in the sales tax or excise duty that such procedure of zero-rating of export cannot be operated without introducing a full-fledged VAT all along. The other arguments about creating distortion in the allocation of resources, increasing the cost of production, increasing prices, and inducing vertical integration are not convincing.

(e) Some well-known economists have pointed out that GST is better than demonetisation in removing black money. This is a misconception because the purpose of the two is different. Demonetisation is intrinsically designed to remove black money, whereas GST is designed to make easy payment of all taxes in one bundle to make India as one market. Even otherwise, GST does not fully prevent evasion, judging from the fact that there are intrinsic weaknesses in the design of GST due to the enormity of the number of the invoices which cannot all be matched.

The above treatise should settle many conceptual issues.

The writer is member, Central Board of Excise & Customs (retired)

Email: smukher2000@yahoo.com