GST ushers in a new tax regime in India which will introduce one single tax for all indirect tax transactions across the country. Various benefits of GST are:
- It will help the country achieve the objectives of free trade and commerce throughout the territory as laid in Article 301 of the constitution.
- It will lower the burden of indirect taxation on Indian people. Indirect taxes have grown rapidly and are regressive in nature as they tax rich and poor at the same rate. Introduction of GST will lower the effective rate and thereby help poor manage their expenses better.
- GST will simplify taxation filing and payment by MSMEs, thereby enhancing the tax base of the government. This should increase tax collections for the government.
- GST will unify tax rates across the country on manufacturing, thereby promoting manufacturing in states where they are not present due to tax differences with other states. This will enable Make in India.
- It is expected to boost the economic growth by 0.5%-1%
- GST will help Indian products compete internationally as taxation rate will reduce on value-added products.
- GST will reduce collection costs for the government as well as filing costs for corporates, thereby increasing efficiency of tax collection.
- It will impinge on financial independence of the States, thereby hurting the spirit of Cooperative federalism in the country. This has been addressed by providing equal voting rights to States in the GST Council.
- However, questions remain over how it will affect the ability of states to address regional developmental problems.
- Also, the centre has veto power in the GST council, thereby raising concerns over states’ ability to further their interests effectively.
- It will lead to large loss of revenue for State government. This has been resolved by compensating the States for any loss in revenue by the Centre.
- Its implementation if done poorly could lead to an economic downturn in the economy.
Federalism and GST:
In Constituent Assembly debates, Dr. BR Ambedkar vigorously defended the right of the States to tax their residents. He said this would enable states to exercise the mandate for development and growth given to its representatives by the people.
Impact on States:
- States will not be able to levy special taxes to help relief and rehabilitation of people during natural disasters, thereby exposing them to adverse outcomes after such disasters.
- States will not be able to finance local schemes related to any social or economic issues such as Swacch bharat and these will be purely planned and financed by Centre only.
- Small scale/Tribal industries might be destroyed: States will not be able to protect their own local industries run by tribals, minorities and other groups with traditional products from manufactured products in other states. This could destroy their small scale industries.
- Veto power of Centre in GST Council can be used to sideline issues important for the States.
Problems with GST:
- Federalism: Does GST enhance federalism? If we look at large country peers, the US does not have a centralized GST. In fact, many states in the US have the power to impose income tax in addition to state-level sales tax. In the European Union (EU), each member-state (country) has retained fiscal autonomy. The Maastricht Treaty only forced members to remain within the limit of fiscal deficit of 3% of gross domestic product (GDP). Even this ceiling was breached early on by EU’s two biggest members, France and Germany. After the sovereign debt crisis starting with Greece, and after Brexit, all bets are off. The fiscal rebellion may spread. China does have a national GST, but spending and resource raising autonomy given to provinces (states) is immense. Indeed, the governors’ performance is purely linked to capex and GDP growth, and they enjoy de facto fiscal autonomy. In comparison to the US, EU or China, the GST in India will greatly curtail the fiscal autonomy of states. It is unlikely that we will have income tax powers bestowed on state governments.
- Progressivity: The GST is an indirect tax. The poor bear a disproportionate burden of indirect taxes. India has a very low direct tax-to-GDP ratio. The ratio of direct to indirect taxes in India is 35:65. This is exactly the obverse of most of the developed world. Income tax rates have steadily reduced, whereas service tax rates have gone up from 5% in the mid-1990s to 15% now. Swachh Bharat and Krishi Kalyan cesses are recent examples of new indirect taxes. Less than 5% Indians file income tax returns, but almost all Indians pay indirect tax in one form or another. A starting GST rate of 18% (as per current discussion) will hurt the poor more than the rich. Early discussion was around a GST rate of 12% or 13%, which has now drifted to 18%. At 20% or higher, we might as well not have a GST.
- Legislative cap on GST: Excise duties on petrol and diesel were raised almost a dozen times in the past one-and-a-half years. These are indirect taxes. Did we pause to wonder, how is it that the excise duty hikes did not require parliamentary approval? That’s because the frequent tax hikes were executive action, empowered by emergency “war powers act”. If GST can be tweaked upward just by the executive, it will become more and more regressive, worsening income inequality. Hence a legislative cap (via the bill, not necessarily in the Constitution) is needed to prevent future misuse. Bear in mind that tax buoyancy (and elasticity) of a tweak from 18% to 19% is much higher, and hence easier than widening the direct tax net. We need to curb this temptation to increase taxes through a legislative restraint, i.e. a cap on the GST rate
- Council governance: GST disputes will be thrashed out in the GST council. Small and large states will have equal voting powers. Is this fair? Large producing states like Maharashtra already fear losses in excess of Rs.14,000 crore in the first year itself. It is asking for larger reimbursement. Other voting states may “gang up” against Maharashtra and veto such a proposal. What if a larger state wants to impose a higher “sin tax” or give a bigger subsidy at the lower end of the GST slab, since they can afford it? Will the current governance framework provide such a leeway?
- Tax disputes: The power of the sales tax commissioner at the state level enables speedy resolution of disputes. But the excise framework uses the process of appeals and tribunals, involving interminable delays. This distinction is called the “revision” versus “review” approach. Will the GST lean the excise way, or sales tax way? Will we soon have a mountain of disputes and long judicial delays?