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Why GST will be worse than VAT

GST,GST latest news,GST updates,GST implementation,GST registration, GST Advisory

No need to fret over a transitory cess on demerit products under the Goods and Services Tax (GST). In fact, the cess on tobacco and luxury products is the least worrisome proposal the GST Council has put forth.

By all means, this cess would be far less messy than the type of GST which is being evolved. The GST Council, after four rounds of cordial display of cooperative or rather competitive federalism, is all set to gift the nation a GST which, in all likelihood, will be worse than the existing VAT.

Forget one-nation, one-tax. The GST Council, evidently in haste, is already halfway through with the framework of a "modern" tax system comprising multiple GSTs (Centre-State-Interstate), authorities (Centre-States), tax rates, registrations and audits, and it may end up with dual control as revenue bureaucracies of Centre and the States would not renounce their administrative powers.

The GST may come to force from next year but GST Council’s nod to multiple rates system has already taken away the maximum benefits. The GST is likely to come up with four core rates (5 per cent-12 per cent-18 per cent-28 per cent), two allied rates (gold and petro products), some cesses and a five-year cess.

The GST was cherished as a pro-growth and anti-inflationary tax system only because the latter was expected to cut down a number of taxes and tax slabs, significantly. With three taxation levels, six rates of taxes and a plethora of cess, the GST is all set to become a flawed successor of the VAT-excise-service tax trio, already in hand.

The GST with only one or maximum two slabs of taxes is not an unrealistic expectation. As the anti-inflationary character of GST hinges upon the least incidences of taxation, most of GST nations have gone for it.

With GST, it was expected that the Centre and States will astutely place limited number of products and services under one or two tax slabs and push a good chunk of products out of the tax ambit to unleash demand (consumption) and investment, eventually. Less number of tax slabs coupled with zero exemptions is bound to prompt better compliance and greater revenues.

A bold GST could have become truly transformational. As under the GST, the Centre and States are willfully limiting their power of taxation, they were expected to contain wasteful expenditure, augment non-tax revenue and broaden the direct taxes (Centre) base to offset revenue losses.

However, with a six-rate GST, it is not difficult to conclude that the government won’t dilute taxation power, rather it would like to go for taxing everything in whatever possible manner under a so-called modern tax system.

Let’s dig deeper into the GST Council-approved structure to find out why the GST is bound to become inflationary.

Under the present set-up, several goods of general consumption are exempt from VAT and excise duty. On certain products, there is a VAT of 3, 5 and 9 per cent. There is 6 per cent excise duty on some others. Under the GST system, all goods with 3 to 9 percent VAT and 6 per cent excise will be covered under the first slab of 5 per cent. As "cooperative federalism" has agreed to 5 per cent basic rate of GST, a very small number of products will stay in the tax-free or zero tax category.

We can safely assume that under the GST, most goods and services will be taxed at a rate of 18 per cent as per the practice of common GST for goods and services. Under the proposed structure, services inflation is inevitable as service tax will be upped 18 per cent from the existing 15 per cent.

With multiple rates, the GST Council has cooked a mess not only for consumers - it is going to be a much bigger chaos for trade and industry. The input tax credit, refund of tax paid on raw material and services, is the bedrock of the GST system as the latter neutralises the repeated taxation on a product or service and curbs inflation in the end.

Multiple GST rates will complicate the structure and make tax credit claims extremely cumbersome. This structure may lead to a dispute on classification and add to administrative and compliance costs.

The GST council has already given the green signal to multiple registrations, returns (as much as 61 returns every year) and audits under GST rules.

Pertinent to mention, India ranked 172nd for paying taxes in the World Bank’s latest ranking for ease of doing business among 189 countries. India's ranking on paying taxes is worse than Pakistan and better than Nigeria and Somalia only.

Looking at meetings of the GST Council, it seems as if this reform is only concerned with the revenues to the Centre and States. The GST Council has completed most of its trade consumer sensitive agenda, except the jurisdiction of assessees, without a single open discussion with key stakeholders.

Moreover, the GST Council is fast turning into an unreasonably secretive institution. The GST is not a surgical strike. We have all the right to know what the lawmakers are deliberating while writing the new taxation for the nation. For Digital India’s sake at least, oblige us with a website on GST.

The emerging GST definitely does not fasten hope, but fears. The GST Council has largely failed to deliver us a modern indirect tax system. Let’s hope Parliament will save India's so-called greatest economic reform from being a nightmare.

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