Commendable GST, with regrettable flaws

Goods and services tax (GST) and Shakespeare’s character of Hamlet have something in common. Both combine greatness with tragic flaw. The greatness of GST has been always advertised for long but now the tragic flaw also needs to be understood properly, so that we do not overestimate this great tax reform.  

I am one who remembers the pre-Modvat days; I was a collector of Customs and Central Excise in 1986, when Modvat was introduced. And, I remember it for the sheer simplicity of that system. It was a turnover tax, admittedly the most simple tax structure. But, economically it was not the best. GST will surely be a game changer and bring immense benefit to manufacturers, traders, exporters and others but it will be illusory to expect too much from it.  So, guard against over-expectation.
So far as the greatness of GST is concerned, the following are the most important:

(a) One tax:  The common base for charging GST for Centre and states will consist of an amalgamation (subsuming) of several central and state taxes. It will enable us to have one tax, rather than about 16. ‘One Nation, One Tax’ does not mean one rate.

(b) Common market:  There will be a common market in the absence of Central Sales Tax (CST) and Entry Tax. 

(c) No entry tax: The abolition of entry tax will be a boon for the movement of goods by road transport. Some 16 per cent of time for truck movement were being lost at state borders. 

(d) Common exemptions between Centre and states.  

(e) Concept of manufacture will go. It was the single most litigated subject.

(f) Zero rating will be more comprehensive and easy, which should boost export.

At the same time, do not expect too much from GST.  

(i) The big central excise tariff is not going: The rates have now been fixed at zero, 3, 5, 12, 18, and 28; controversies for classification will remain. The CCCN classification like 44079990 or 76069110 will continue. And, the difference of duty between soap, detergents and similar products continues.  I spent my whole official life distinguishing between Tweedledum and Tweedledee. The future generation will do the same. It is sad the bad days are back again.

(ii) Revenue: Some argue that revenue will boom due to stoppage of leakage. They are plain wrong. Value-added tax (VAT) was already there, so as all the so-called self-policing properties. So, nothing strikingly better can be expected. 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. There is a lot of evasion there. 
(iii) Distinction between goods and services will not go and the much-hyped advantage of GST of combining the two has remained on paper. 

(iv) Inflation: Inflation will also depend on whether the total tax collection is much higher than the normal expectation. For common items, tax has gone down. So, the Consumer Price Index will not go up but the Wholesale Price Index might.

(v) Anti-profit law draconian and unconstitutional: The provision for cancellation of registration under Section 29 (2) under the GST Act and under Rule 14 (3) (d) is blatantly unconstitutional. It is directly against the fundamental right under Article 19 (1) (g) to practise any profession, or to carry on any occupation, trade or business. 

Second, all fiscal laws like the Customs Act, Excise Act, Sales Tax Act, Service Tax Law, Income Tax Act, etc, provide for fine, penalty and prosecution. Here, too, prosecution could have been provided for. That would be legal but not advisable. But, to take away the right to pursue on occupation, trade and business is absolutely extraordinary, excessive, whimsical, arbitrary and unconstitutional. This rule has been written without any application of mind about its impact on the market. It is a terrorist law.  

So, the conclusion is the GST we are heading towards on July 1 will be a game changer but with grand defects. Lawyers will be happy and officers will have a field day.
The writer is retired member of the Central Board of Excise & Customs. E-mail:

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