The Prime Minister in his inaugural speech at midnight on June 30 referred to GST as a life changing instrument for the poor. The implementation of GST has the potential to transform India's economy, as for many years we had a horrendous system of multiple indirect taxes like excise duty, customs, sales tax etc.
The new avatar of the indirect tax regime is called a technological as well as a fiscal marvel, though it is far short of a perfect regime. The inherent idea of "One Nation, One Tax" is the essence of the new regime. It is a popular model across the world but the very idea has been diluted to "One Nation, Multiple Slabs of Taxes".
In 2009, the 13th Finance Commission had strongly recommended for a single tax regime of 12 per cent but the same has been conveniently ignored by the Expert Committee on the Revenue Neutral Rate for GST in 2015 which suggested a threerate structure and later settled for a four-rate structure.
At present, the Centre collects 62 per cent of the total tax revenue, but with the onset of the new regime, the taxing muscle of the Centre with respect to indirect taxes has been expanded to 83 per cent of overall tax revenues leaving the states' treasuries high and dry.
Thus, the GST regime is hijacking states' taxing power. The GST council is more union-centric and directly interferes with the financial sovereignty of the states which is against the spirit of fiscal federalism. Experts believe that the existence of the 12 and 18 per cent tax brackets – and their interactions with the 5 and 28 per cent brackets is an outcome of political arbitrariness and industry lobbying.
Moreover, taxing several items including some commonly used goods at a steep 28 per cent rate is quite alarming and defies any logic or common sense. India now has attained the notoriety of being the highest GST rate imposing nation among GST adoptees.
The new regime was supposed to mean lower taxes; instead, it is riddled with the irrationality of high rates. Nearly 60 per cent of all goods under GST are being taxed at either 18 or 28 per cent, of which one-fifth of all goods are in the 28 per cent rate bracket, which ideally could have been kept only for certain classic luxury items.
Economists often wonder under what economic rationale does the GST fitment committee justify keeping cashew and raisins at 5 per cent but almonds and other nuts at 12 per cent? Similarly, a 12 per cent tax on sanitary napkins imposed under the new GST regime is criticised as gender insensitive.
Citizens are inherently honest tax payers but the government should be more sensitive for a fair taxation regime which is less pinching. Higher taxation like 28 per cent is ruling on the top slab which is prone to rampant tax evasion. Why couldn't we have a flat 12 per cent GST, shared equally by the Centre and states? Such a tax rate would have given a major boost to the economy.
It could encourage consumption and tame inflation by lowering tax on many essential items. It is bizarre that while cement, iron, bricks and work contracts are under GST, once flats constructed using these items are ready for sale, GST will not be levied on them. The nation missed an excellent opportunity to take on the rampant flow of black money trailed through real estate and alcohol.
The government's sweetener for the states is equally a non-starter which is likely to pose another big challenge. With so many social and economic diversities, GST is bound to invite a barrage of complexities in compliance. For example, if a service provider was earlier filing two service tax returns a year, under the GST regime he has to file three returns a month – on the 10th, 15th and 20th – all online which would mean 36 returns a year.
Additionally, he has to file 12 TDS returns, plus one annual return. So cumulatively, a person who was filing two service tax returns will have to file 49 returns. If the same service provider is operating in 10 states he would be filing 490 (10×49) returns. There is an unimaginable load on the system which is yet to see a day of defect-free operation.
The traders of small towns will face a technological nightmare as internet penetration with continuous power supply is poor. Lack of preparedness of the IT infrastructure needed for a smooth roll-out of the GST is another sore point. Economists and experts wonder what was the tearing hurry in lunching a massive reform without adequate preparedness.
Setting up of an anti-profiteering authority by law, or designating an existing authority to carry out the functions is another thorny issue at present. The authority will be responsible for ensuring that the reduction of tax rates on account of implementation of GST results in a commensurate reduction in prices. The idea of government monitoring and control on prices of all goods and services is anathema to a perfectly competitive market which would be bound to usher an era of inspector raj.
Keeping liquor, electricity, petroleum (till notified) outside the purview of GST is illogical, when it is considered to be all encompassing. Though global oil prices have steadily declined over the last six years, the NDA government has increased excise duties by over 150 per cent over the last three years. The industrial sector, especially the services sector, is waiting for more clarity on tax rates.
The mechanism of consumer complaints on overcharging of goods and services is yet to be in place. A more complicated GST is likely to yield less favourable returns. A recent analysis by HSBC shows that the rollout of GST is likely to add only 0.4 per cent to GDP as against 2 per cent growth projected by the Finance Minister.
The other crucial aspect is that while the exemption threshold is now Rs.20 lakh, for many small manufacturers it used to be Rs.1.5 crore. This means that thousands of hitherto informal or unorganised MSMEs will either shut shop or come into the tax net. Small traders, businessmen and many others are in a state of confusion owing to the new regime and some have even staged protests. Because of the insane paperwork, the cost of regulatory compliances will increase and there is no substitute for this.
Many experts opine that the current four-rate structure will spark a flood of litigation – on everything from the tax brackets that companies fall into to the revenue they generated. This will likely add to the roughly 100,000 indirect tax appeals that have been pending as of March 2015.
Though big business is largely satisfied with the new system, smaller businesses are afraid this will be another nightmare like demonetisation. The genuine concerns of stakeholders, especially those of India's 60 million small traders and businesses, cannot be overlooked.
Even though the GST regime is riddled with multiple glitches, the Government has been insensitive to genuine concerns of the stake holders. It was imperative that sufficient time should have been given to build up infrastructure; the process of treatment of rates for different goods explained and an awareness drive launched among small and medium traders.
Despite so many drawbacks in the implementation of GST, the journey has now begun. It is likely to be rocky for some time but expectations are high for the future.
(The writer is an Advocate, Supreme Court of India.)