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Eulogising GST is inviting illusion
June, 18th 2012

Both the industry and the government are making too much of tall claims about what GST has in store for us. A chief of a federation of industries has said that it can add 1.5 per cent to GDP. The finance ministry also made similar claim in the latest bulletin issued by Press Information Bureau on May 22, 2012. I am writing this treatise to say that tall claims about the outcome of GST will prove to be infructuous. GST is good for so many reasons. But it should not be eulogised for what it is not.

GST is good for the following reasons. It will remove a hugely big central excise tariff and highly enumerative service tax regime. A comprehensive GST will have only one entry namely goods and services and one or two rates of duty. All controversies regarding classification of goods and services and the need to distinguish between goods and services will be over. A common market for the whole of India will also be achieved. This, however, is the ideal situation. But GST in India is far from this ideal. The number of controversies that have arisen with the states on various issues, mainly the issue of fiscal autonomy of states, shows that on a day-to-day basis the operation of GST will be as difficult as living in a joint family of dozens of brothers and sisters who differ on every little issue. There can never be a consensus in such a situation. A two-thirds majority for a decision should have been better but that is not the norm so far. So there will be nothing but a stalemate on every issue. Right now VA T on cigarette is different in every state which was not what VAT was designed to be.

Those who argue that GST will increase GDP by 1.5 per cent say that it will be because of checking of leakage of revenue. Higher collection of tax would mean more investment and more growth in GDP. This is 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 a money spinner. Very recently the Prime Minister of Italy, Mario Monti, has requested landlords, plumbers, electricians and small businesses to stop conducting large transactions in cash. Italy loses more than euro 120 billion in unpaid taxes every year. Situation is equally bad in Spain, Greece, Ireland, Portugal, etc. The claim that the consumer will benefit due to less tax burden of tax, is directly contradictory to the claim that the revenue will increase so much. The thesis that GDP will increase by 1.5 per cent has not been proved by any research institutions. Nobody owns this claim but some how or other everybody has taken it for granted. I am of the firm opinion that the story of increase of GDP by 1.5 per cent is highly exaggerated. Conceptually, there is no reason for revenue to increase. There is already CENVAT at the Centre and VAT at the state-level. GST is nothing but an amalgamation of CENVAT and VAT and some existing taxes . So the revenue will remain the same. It can only increase if the tax base is expanded and if evasion is stopped. Neither is going to happen if GST is introduced. If CENVAT is evasion prone and if VAT is evasion prone now, then the amalgamation will also continue to remain evasion prone. There is no reason why it will be any different from what its two major constituents are.

Much is said about removing the cascading effect because of GST. Those who say that forget that already the CENVAT and VAT have removed cascading. That is what has been claimed all along. So when they are amalgamated, how should the amalgamation remove cascading which has already been removed?

It has been claimed that goods will be more competitive in the international market. Researches by the experts on the subject have not proved this claim. If all countries have resorted to GST, the effects cancel each other in the international market.

The conclusion is that the GST will be good for some reasons but expecting too much from it is neither logical nor economically sound.

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