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Simple tax made complex
November, 14th 2017

THE recent spate of rate cuts in the Goods and Services Tax (GST) are a welcome development but should not be greeted with too many hosannas. Much more needs to be done to turn GST into the much-vaunted simple, one-point tax that was the original objective. Even with the several types of GST and the multiple rates that were built into the system, it should have been rolled out in a much less complex manner than it was in July. The complications have had little to do with the apparent haste with which it was launched, but more with the bureaucratic rigidity and mindsets that refuse to emerge out of licence raj mentalities. It was for political leaders to have stymied attempts to increase the regulatory complexities by revenue officials right at the outset. Currently, it has been reported that the GST Council left only 50 items in the 28 per cent tax slab as against the officials’ committee suggestion to leave 62 items in this segment. In other words, political leaders took a more pragmatic course of action and sought to reduce more goods in the highest tax slab than the officials. This is the approach that should have been taken much earlier.

In the absence of a firm guiding directive to ensure simplicity of operations, officials were allowed to create extreme difficulties in the operation of GST. The net result has been that most small traders and businesses have not been able to tackle the forms and filing regulations on their own. Accountants must be having a field day as they are needed to guide trade and industry through the regulatory maze of GST. One media report even says that customs and excise officials were not able to fill in the forms on their own, when asked to do so as part of an experiment. Apparently, only then was it realised that the forms were too daunting to be filled in by those in the target group.

GST was meant to be a single-point tax that would cut through the red tape of multiple taxes levied at many stages of production. Many other countries have also adopted a similar levy and studies have shown that government revenues have increased significantly following its introduction. In addition, there has been a rise in the gross domestic product as well. India’s own economic think tank, the National Council for Applied Economic Research (NCAER) has predicted that the launch of GST could raise the GDP growth from 0.9 to 1.7 per cent.

In this country, it was launched as a three-tier tax instead of a single-point tax. So now, there is an inter-state GST levied on the movement of goods from one state to another, a state-level GST and the regular Central GST. In addition, there are four tax slabs ranging from 28 per cent to 5 per cent. To add to the confusion, the government’s biggest revenue earners of petroleum products and alcohol have been left out of its purview. Many economists had felt this kind of warped GST should not have been rolled out and the country should have waited for all states to agree on the original format. Realistically, however, given the political compulsions of a federal polity and fears of state governments over revenue losses, this was probably the best that could have been achieved in the beginning. At the same time, the Central government could have helped in ensuring that the rollout was easier by adopting a less complicated regulatory framework. For instance, the insistence on filing monthly returns and preparing convoluted forms that even officials themselves cannot understand. Besides the GST network is reported to have had many glitches and added to the confusion. As for the tax slabs, the highest rate of 28 per cent needed to have been kept only for minimal items.

It is this rate that has caused such a hue and cry among consumers, and with good reason. West Bengal Finance Minister Amit Mitra has gone on record to point out that such a high tax is not levied anywhere else in the world. Therefore, he said it had been suggested that only minimal items be kept in this slab. Instead, as many as 228 items were kept in this highest slab. In addition, as Finance Minister Arun Jaitley has conceded, there was not only need to cut items from this high level, but it was also necessary to eliminate some items that were not even covered by excise duty in the past. Even now, it boggles the imagination as to why white goods like refrigerators and washing machines should be considered as “sin goods” and kept in the highest slab. Both are essential labour-saving devices needed by lower income groups like all other segments of society. In fact, costs should be brought down to enable these to be affordable by all.

As for the decision to deny input credit to the restaurant industry, it is indeed questionable. The rationale that restaurants have not been passing on the benefit of input credit to customers is not viable since probably this could apply to many industries. Besides, there are other avenues for the government to explore to tighten the reins on the restaurant category rather than to destroy the actual structure of GST. Denying input credit is a step in the direction of ruining the architecture of the tax itself. It also betrays once again a licence raj mentality where the government can punish an industry. Instead, it would have been wiser to seek recourse under the new anti-profiteering provision of the GST law.

As a result of the many errors in rolling out GST, the government is now in a rollback mode. The reasons given are several, including the need for a better image due to the Gujarat and Himachal Pradesh elections. But the fact is, these changes were essential if GST is ultimately to be a success in this country.

The way forward now is for the government to move towards even greater simplication of GST to ensure that it fulfils the original aim. This was to have a simple tax that would lead to better compliance and higher revenues. Unless this single-point objective is kept in view, GST may ultimately become a disaster rather than the long-awaited stimulus to the economy.

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