Short-term inflationary impact has characterised the switchover to GST in almost every country, and governments had intervened appropriately to curb the trend, sometimes by adopting extraordinary measures and policies for limiting price escalation by businesses like freezing prices and profit margins, price monitoring, publicity campaign, enactment of anti-inflation laws and reduction of other taxes.
When VAT was introduced in India with effect from 1 April 2005, no such measure was adopted. As a result, there were either unexplained increases in prices, or businesses refused to reduce the MRPs despite the decline in the tax rates of their products, as pointed out by the CAG in in 2010. We ought to be more proactive this time, having learnt from the past.
One particular concern in Australia, as in India, was to ensure that there was no undue profiteering in the implementation phase and that the benefit of reduced costs was passed on to the consumers to mitigate the immediate impact of GST on prices. The anti-profiteering provisions of our GST Act derived some useful ideas from the GST Acts of Australia and Malaysia which have stringent anti-profiteering provisions in their respective GST Acts.
Social acceptance of any new tax is vital for its success, and public criticism and debates play a significant role in informing and moulding public opinion. The political risks and costs of introducing the GST are always high, but proper management of the transition and follow-up can always act as safeguards against the risks. Nearer home, Indonesia was the first ASEAN country to implement the GST in 1984.
All the eight members now have GST in place, Malaysia being the latest to join the tax regime in 2015. When a GST Bill was introduced for the first time in 2009 in the Malaysian Parliament, it attracted mounting criticism from public and political opposition, and the bill had to be withdrawn. Finally, on 1 April 2015, a uniform 6 per cent GST was introduced, replacing the salesand-service tax regime of indirect taxes.
The effect of replacement of the single-stage sales and service taxes to a multi-stage GST was highly disruptive ~ inflation went up immediately, consumer confidence nosedived and public protests erupted. But the timing of its implementation had coincided with the steep global slump in oil and gas prices between 2014 and 2016, and the successful implementation of the GST had helped the federal treasury to cushion the impact of lower oil revenues.
By that time, the public protests and opposition had also fizzled out. Twelve months later, business confidence was restored and 70 per cent of the businesses reported growth. As the Malaysian Prime Minister had rightly said, “GST has been our saviour”. Like in India, Malaysia also had a problem of black economy, with estimates ranging from 9 to 27 per cent of GDP, and emphasising the need for a more efficient and effective tax enforcement regime.
The World Bank has reported that the “hidden or informal economy” constitutes 31 per cent of the Malaysian economy. As in India during the post-demonetisation period, searches led to the seizure of black money. The procedural changes necessitated by GST were phenomenal and it jolted the entire gamut of commercial operations in Malaysia. At the end of June 2016, there were over 7,294 GST appeal cases, indicating the extent of the taxpayers’ grievances. But the Government had created a social safety net in the form of monetary assistance to compensate poor households, along with a package of measures to mitigate the impact of the new tax, benefiting about 4.7 million households and 2.7 million individuals, to address the adverse distributional effect of GST. But the concerns of the small and medium enterprises (SMEs) were not properly addressed; about one-third of the firms audited by the Malaysian Customs during September 2016 were facing problems very similar to India’s.
GST contributed about 18 per cent to Malaysia’s federal revenue in 2015, a share that is bound to increase substantially with an expanding economy. Share of GST varies widely from country to country depending on the structure of their tax systems and expenditure priorities, and the rates as well as threshold amounts also show wide variations. Thus no horizontal comparison among different countries in respect of GST will be valid. About 160 countries have adopted some form of VAT or GST, but most of these would be vastly different from the dual destination-based system that Canada and India are following.
Among the OECD countries most of which had switched over to VAT/GST during the 1970s and 1980s, Chile raises as much as 55 per cent of its total tax revenue from GST, followed by Turkey (44 per cent), Mexico (36 per cent) while Japan raises only 20 per cent of their total revenue from GST, against the OECD’s average of 33 per cent. The rate varies from 5 per cent in Canada to 6 per cent in Malaysia to 15 per cent in New Zealand to 19 per cent in Germany, 20 per cent in France and 27 per cent in Hungary. Japan had introduced a consumption tax in 1989 the rate of which was increased from 3 per cent to 5 per cent in 1997. The effect was devastating and Japan went into recession. In 2013, the Shinzo Abe government increased the rate to 8 per cent, while postponing the proposed increase to 10 per cent till October 2019.
The experience with GST of these and other countries make one thing clear ~ that GST everywhere has followed more or less the same track and has run the same course, causing similar ripples, disruptions and turbulence, but everywhere these distortions have proved to be temporary. Ultimately the new system has found its own equilibrium in every country wherever it was launched, and there is no instance of any country rolling back the new system after having launched it. Everywhere, there was an initial surge in inflation and economic growth had suffered in the immediate aftermath of the introduction.
Eventually, however, growth attained greater momentum and inflation could be controlled everywhere. The Indian experience is a repeat of this universal trend and there is no particular reason for despondency at the developments that we are witnessing again. These are the undesirable but not unanticipated outcomes, if we are to relate to the experiences of other countries in our connected world because behaviour of the consumer and businesses remains identical everywhere.
The transition phase, that we are passing through, could be longer and more difficult than one might wish, especially in a complex and diverse country like India. It is crucial that this phase be carefully negotiated, by drawing lessons from other countries. GST delivers in the long run, specifically a time-frame of 3 to 5 years. In the end, GST has been working well in every country.
Global experience also suggests that our GST may not be as imperfect as it is made out to be by its critics. In many countries, there are multiple rates and a wide variety of exempted goods and services, and essential supplies needed by the poor often attract a reduced rate of taxation. Real estate and petroleum are covered in some countries but excluded in others. There cannot be a one-size-fits-all solution; different countries have different systems at the national and subnational levels. SMEs have been affected almost everywhere.
Apart from their valid concern about lack of capacity and technological weaknesses, which need to be addressed urgently, problems have also arisen from a certain reluctance to comply with the new tax regime which makes tax evasion difficult.
Awareness and public education are essential for the success of any new system, to make way for its acceptance and voluntary compliance, without which no tax system can ever achieve its objectives. There are many lessons to be learnt from the international experiences and the sooner we learn them, the better.
(The writer is a commentator. Opinions expressed are personal)