GST Updates (28th Oct 2016)

India’s tax reforms running a ground

October 27, 2016
Is the tax reform agenda running aground? That is the impression one gathers from the Centre’s proposals on the goods and services tax (GST) presented at the mid-October meeting of the GST Council. These proposals would have undermined the logic of the GST reform. Fortunately, they were not endorsed. The Centre proposed a four-rate structure — six, 12, 18 and 26 per cent. But it added a rider about a higher rate for some demerit goods and a four per cent rate for gold (against which bullion and jewellery trades are already lobbying). Add the zero rate which will apply to many basic goods and services and, in effect, we have a seven-rate structure proposal. In addition, there is some back-tracking on cesses which were supposed to be absorbed. It appears that a couple of them will continue. There is also a peculiar proposal for cesses on demerit goods to raise their rate well above the top 26-per cent rate and help raise the amount the Centre needs to compensate the states for any shortfall. One defence given is that the principle of a uniform rate for each item across the country has been preserved. But if that had not been done we would not have a General Sales Tax! The important goal of rate structure simplification has been sacrificed. There are clear signs of a takeover by the tax bureaucrats who probably designed a structure which would allow each taxable item to be placed in a bracket that would mean minimal change relative to the present applicable rate. This is also implicit in NITI Aayog Vice-Chairman Arvind Panagariya’s defence that the multiple rates would make the revenue collection and inflation impact more predictable. One can guess the tenor of the internal arguments. To drop the simpler 12-18-40 per cent proposal, someone would have pointed out that an 18-per cent rate on durables would lower the tax incidence too much and a 40-per cent rate would raise it too high. Other “anomalies” would have been identified. Such an attitude must rest on the belief that the present rate structure is right. But if that is the case why have the GST? Does not the key goal of simplification imply that the rates on some items will rise and on some will fall? Trying to preserve tax incidence on each item is a very clumsy way of implementing the revenue-neutrality requirement. Revenue neutrality has to apply to the total collection, not to how much is realised from each taxable item. The potential differential impact of this on states is mitigated by the commitment to protect this level for five years. One reason for the GST reform was to reduce the lobbying for changing the rates applicable on individual items. The structure proposed by the Union finance ministry and the stated theology of categorising items as essential, standard low, standard high, durables or luxury/demerit is an open invitation to producers’ and traders’ associations to put forward suitable arguments to be shifted to a lower rate category. The theology should be that there is a default standard rate and a limited number of departures from this in both directions. A simple GST structure will reduce the demands on the tax bureaucracy, contain corruption and competitive policy leveraging and allow savings in tax administration. The predictability concerns leading to the multiplerates proposal apply to the taxes on goods. The service tax is already a uniform and is meant to remain so in the new GST structure. But can this distinction between the G and S part of the new structure be maintained? Will we get lobbying for lower rate categories for services which can advance suitable theological arguments for this? The GST reform was to be a game-changer. What we got from the finance ministry was just a name-changer, with the old rates left more or less unchanged but given a different name. Implementing the GST by April 1, 2017 looks like a very big ask. The first year or so of GST implementation will generate a backlash as the hitches in the system surface and the in-built pressures for compliance drag former tax avoiders into the net. The key benefit of setoffs for taxes paid will kick in only after old input stocks are used up. Competition is expected to lead traders to pass on the set-offs but that too may take time to take effect. If implementation gets pushed forward to 2018 then electoral compulsions may dictate a postponement of implementation to 2019 after the election. Mr Jaitley, time is running out. With regard to direct taxes, the reform agenda seems to have gone into some sort of limbo. The Direct Tax Code has been put in cold storage and the finance ministers Budget speech focussed on a phased change in corporation tax with the removal of exemptions and a corresponding reduction in the corporation tax rate to 25 per cent over four years. But unlike the GST debate, there is no process of consultation or discussion to identify a road map which investors can use for their decisions. There is no indication of any rationalisation of personal taxation and the impression one gathers from the Budget speech is that the plethora of concessions will continue. The case for simplification is as great for direct taxes and is easier to pursue as it is within the central government’s competence. We need a public discussion on the need for additions and deletions to the armoury of direct taxes, applicability, and rate structure — a new Kaldor Report in effect. Let me here throw in one suggestion applicable to the GST and to direct taxes. The overall tax incidence sometimes has to be adjusted up or down for macroeconomic management. Once a rational rate structure is set up it is irrational to fiddle around with rates to secure a macroeconomic effect. Instead, tax reformers could consider the feasibility of Level Regulators for the GST and direct taxes that would adjust rates proportionately up or down by the amount required to secure the desired macroeconomic stimulus or restraint while preserving the structure. A similar inflation regulator could also be used to adjust direct tax slabs for inflation. If this could be done, the second part of the budget speech dealing with tax proposals could be reduced to one paragraph! –[27-10-2016]

Published by Business So Simple

Hi, I am business consultant working with a team of Chartered Accountants, Company Secretaries, Lawyers & MBAs. I am promoter of " Make Your Business So Simple" "Make Education So Simple" Make Life So Simple" Make Legal Affairs So Simple".

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