Don't eulogise GST for what it isn't

Both industry and government made too many tall claims about what GST had in store for us before it was introduced. The chief of a federation of industries had said that it could add 1.5 per cent to GDP.  The finance ministry also made a similar claim in a bulletin issued by the Press Information Bureau on May 22, 2012.  I am writing to say that tall claims about the outcome of GST have become infructuous because it was not made according to the original design.  GST has been good for many reasons.  But it should not be eulogised for what it is not.

GST has been good for the following reasons.  It has removed a large number of taxes by combining them.  But the expectation was that the huge central excise tariff would be eliminated. This would have been possible if the rates of duty were only three (apart from nil) —namely 5 per cent, 16 per cent, and 28 per cent. 5 per cent and 28 per cent would give an enumeration of the items.  And all others would fall under 16 per cent, automatically.  But 12 per cent and 18 per cent at the moment have kept the full central excise tariff alive. The old-style controversy about classification continues. This means all the issues regarding manufacture, definitions, and interpretation continue.  Interpretation itself is a highly complicated subject on which legal authorities have written innumerable books, and it is a favourite hunting ground for lawyers.
Regarding revenue realisation, there was a huge expectation that GST would lead to checking of leakage of revenue. It was concluded that higher collection of revenue would mean more investment and faster growth in GDP. It was a theoretical expectation but is not supported by actual examples.  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 exactly a money-spinner.  It depends on the efficiency of the tax system in a particular country.  Even in Europe, there is a lot of day-to-day evasion of tax.  Some years back, the then prime minister of Italy, Mr Mario Monti, had requested landlords, plumbers, electricians, and small business to stop conducting large transactions in cash.  It was estimated at that time  Italy was loosing more than ^120 billion in unpaid taxes every year. The situation is equally bad in Spain, Greece, Ireland, Portugal, etc.  Conceptually, there is no reason for revenue to increase.  There was already CENVAT at the central and VAT at the state level.  GST is nothing but an amalgamation of CENVAT, service tax, VAT, and some taxes. So the revenue should remain the same if rates of duty are fixed in a revenue-neutral manner.  The 5 per cent rate for a large number of items has dragged down the collection of revenue because we never had 5 per cent for so many goods and services earlier.  Unless lots of items are lifted from 5 per cent tax to 12  per cent, the revenue-neutral rate will not be achieved.

It had been claimed that goods will be more competitive in the international market.  Research by experts on the subject has not proved this claim.  If all countries have resorted to GST, the effects cancel each other in the international market.  So exports from India never got any boost from GST itself.

The claim that the consumer will benefit due to less tax burden is directly contradictory to the claim that the revenue will increase so much.

The conclusion is the following:

GST has been good for several reasons which are the following:  It has solved the chronic controversy over the definitions of manufacture and taxable event. It has also solved the problem of classification in a big way because the controversy is now only between 12 per cent & 18 per cent, whereas earlier there were many more rates. Central sales tax has been abolished and it has led to the introduction of all India market. For checking, trucks carrying goods are not stopped at the borders of states. But expecting more revenue will be unwarranted unless many items in the  5 per cent tax bracket are lifted to  12 per cent. Stopping of leakage of evasion cannot also be expected unless the audit is made more rigorous and intelligence is made more incisive without being overtly ruthless.

The writer is a retired member of the Central Board of Excise & Customs

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