GST is not just a tax reform but it is a socio-economic reform
June, 11th 2015
As the government tries hard to push the Goods and Service Tax (GST), industry experts say that this is going to change a lot of things in the country, and not just on tax front. In a free flowing chat, Sachin Menon, chief operating officer, tax and national head, indirect tax shares how GST would boost socio-economic reform and reduce corruption.
How important is GST for India as of now?
GST is not a tax reform alone; it's a major socio-economic reform. Let's talk about revenue distribution amongst the states. The basic fundamental of any robust indirect tax system in the world is that the tax collected would be spent to improve the social infrastructure. Why does India have uneven development across the states? There are about five to six states that are net exporting states and contribute 60% to India's GDP. These five-six states are net exporting states while others are net consuming states. Historically, what happened was that the tax collected was given to the origin state. Even excise duty is collected by the state where goods are manufactured and not where the goods are consumed. Similar is the case in sales tax. If I am selling the goods manufactured in Maharashtra to Mizoram then the tax paid by the Mizoram consumer is collected by Maharashtra. It is completely against the ethics and foundation of indirect tax system. So as a result those states that have got advantage of development, they keep on developing at the cost of other states. It defeats the very purpose of tax. I spent from my pocket for my consumption, pay tax to the government but I am not getting any benefit of it but it's going somewhere else. As a result we have a lopsided growth across India.
Now under GST the tax paid by the consumer will be given to the state where the consumer resides. As a result now many states will have more funds for development. So it is addressing the inequalities of the distribution of income.
Do you think it would be tough to evade taxes post GST? How?
Today the tax system is fragmented. There are so many taxes; service tax, sales tax, VAT (value added tax), entry tax, entertainment tax and others. All these taxes are administered by different administration. Now a sales tax commissioner wouldn't talk to an excise commissioner. Even within centre a service tax commissioner will not be communicating with the excise commissioner. So these are different islands and they operate in isolation. So this gives a lot of room for unscrupulous elements to declare an account for sales tax, another account for excise and another account for income tax. And since none of these departments will communicate with each other he gets away with it. As a result a lot of black money is generated. Nobody knows how much is manufactured and how much is sold and consumed. So those who are evading taxes get away with it but those who are complying with the law but make some slip-ups unintentionally are being crucified. As a result corruption increases, black money is created and this money is invested in lobbying with politicians and influence policy. As a result the common man becomes powerless.
Can you explain how will GST work in reducing black money?
The GST would integrate all these taxes and will also be integrated with income tax reporting. It is proposing to track the source of the supply whether imported goods or locally manufactured ones. So for every product manufactured there is going to be a bill of material. Say for example, what are the inputs going in to manufacturing a chair? Leather how much, plastic how much, the leavers etc. So when this material is procured it would be mapped out what are the taxes paid on each of them. Once its manufactured entire chair is manufactured entire tax paid on the raw material would be credited back and only the final product would be taxed. As a result only the value addition at every stage is being taxed. Which means no one would be able to evade 100% tax as it's paid in stages by different people. And if the person caught evading the tax will have to pay five times the penalty. So the risk reward ratio will not favour the tax evader. The system would police itself till the goods reach the consumer. And the government will have details of each tax payer's details along with the taxes paid on each stage along with a unique number allotted to the goods. So evading taxes would become tougher. The system would be able to track how many stages the goods passed from the source till the final consumption. If it disappears in between, the system can catch that.
As a result the system would become very transparent. So people who are evading taxes would be forced to declare their income and will have to pay tax. As a result black money generation would go down. If that goes down, then income tax filing will go up. And it would reflect in your GDP. If the black money goes down, the way of influencing policies through lobbying would also reduce dramatically. If you have black money, you can influence "them", no body will accept a bribe through cheque. You just see within just two years of GST, political donations would become legal.
Do you see complications as far as GST and the state governments are concerned?
As far as states are concerned they are collecting taxes under the current VAT system. Earlier the states were collecting taxes on sale of goods only, and centre was collecting taxes on manufacturing and services. Under GST what is agreed is that both the state and the centre can simultaneously tax all services and goods at supply stage. Sale is not mandatory to trigger GST. When you supply the goods, GST triggers. Say for an invoice of Rs 100 the state GST would get Rs 10 and central government would get Rs 10 (assuming that 20% is GST rate and it's divided equally between centre and state). The credit system is very simple under the GST.
What about the concerns of the service industry regarding GST?
If you look at the total GDP segmentation then around 60% of the total GDP is coming from services today. And about 18% is contributed by manufacturing. Manufacturing is not growing in India due to our policies and high taxes. Services contribute just about 10-12% of the total tax collections. Whereas manufacturing is contributing 60-70% of the total tax collections. This is the main reason why services have grown in India. Now as far as taxation principle is concerned services and goods are considered on a par. Yet, services would be charged differently even under GST, but definitely service industry would see its taxes increasing from its current level.