The passage of the Constitution (122nd Amendment) GST Bill, 2014 unanimously on Wednesday evening has paved way for the implementation of the Goods and Services Tax (GST) regime. As Finance Minister Arun Jaitley had said, GST will prove to be a gamechanger for Indian economy. However, economist Professor Arun Kumar thinks otherwise.
“The government is propagating it as a gamechanger, but a carefully-thought, well-balanced approach is needed prior to its final implementation, so that the common man doesn’t get adversely affected by high inflation and price rise of essential commodities,” said Kumar.
The following are some areas of concern as highlighted by the economist:
The impact on small traders: GST is a complex system. Other nations that have already implemented it, faced the same issues. It will pose difficulties for small traders and shopkeepers, as they will need to computerise every input and output detail of their transactions. If they hire professionals to maintain computerised accounts, their costs will go up. Due to this complexity, Value-Added Tax (VAT) could not be implemented in the small-scale sector.
Good for large-scale; bad for small and unorganised sectors: GST will be beneficial for the large-scale sector, as it will provide a single market from which to buy raw materials from any part of the country. But, the small-scale sector produces and sells locally, so it would hardly benefit from a unified market. It is being exempted from the payment of GST and, therefore, would not be able to claim credit for any purchase from the organised sector and would be at a disadvantage. If it sells to the organised sector, it would not be able to provide the benefit of set-off and, therefore, it would have to cut prices or its sales would decline. A decline in the small, tiny and unorganised sector would reduce employment-generation since it is an employment-intensive sector (93 percent). Unlike the large-scale sector, it won’t get that competitive advantage. This will aggravate under-employment, distress in the farm sector and adversely impact the poorer states. That is the reason why MNCs and the large-scale sector have been lobbying for GST. Production will shift from small-scale to large-scale sector.
The price of essential goods may rise: There will be three taxes — CGST collected by the Centre, SGST collected by the states and an IGST on inter-state movements collected by the Centre. Further, under pressure from the states, alcohol, tobacco and petro-goods are likely to be left out of the purview of GST. So will electricity and real estate, which will have separate taxes resulting in a cascade effect. Services did not have to pay a sales tax earlier, but will now have to pay the SGST to the states, so their prices will also rise. For instance, telephone calls, insurance, transportation, school fees, restaurant bills etc will become dearer. A common tax rate will imply that all basic and essential goods prices will rise, and even if some final goods prices fall, the rate of inflation will go up.
On revenue-neutral rate (RNR): The various taxes the government had been collecting earlier would be collected under a single GST. If the tax rate remains the same as earlier, tax collection will fall. Thus, if the government is to collect the same amount of tax as in the earlier tax regime, it would have to raise the tax rate under VAT. This is called the revenue-neutral rate (RNR) and could be pretty high. If there is a loss of revenue, the development of states will be affected. The Centre has said that it will compensate the loss and this will lead to a rise in fiscal deficit.
Inflation, a big possibility: Wherever GST has been introduced across the globe, inflation rose. A rise in inflation is a big possibility. Arguments have been made that GST will completely benefit our economy, which is not fully correct.
Affect fiscal federalism: A common rate for all states undermines fiscal federalism; because different states have different requirements. One can’t compare the needs of a developed state like Maharashtra or Gujarat with that of a poor state. Fiscal federalism has been the hallmark of India’s economy since Independence. Extreme care should be taken to ensure that smaller states don’t suffer in the process.
Tax rate should be pegged at 12 to 13 percent: It has been observed that whenever indirect tax rates have been increased, inflation has kicked up. A rate of 18 percent is too high as it’ll create inflation. It should be pegged at a rate of 12 to 13 percent, which is adequate. Otherwise, the common man will end up paying more.
Tax-GDP ratio: The indirect tax base to GDP is 10 percent, whereas direct tax-GDP ratio is five to six percent. The focus should be on increasing direct tax base to 13 or 14 percent. Prime Minister Narendra Modi also pointed it out and had appealed that 10 crore people should pay tax, instead of only five crore. Effectively only one percent are paying direct taxes in India. So much has been done on GST, but nothing on the Direct Tax Code.
Kumar added, "The good part about GST is that it will help in bringing simplification to the tax regime faced by businesses. All indirect taxes will be on a single platform. The process is complex and too much hype should be avoided. The need is to go slow on implementation while taking a note of consequences. The Centre’s decision not to cap the tax rate in the GST Constitution Amendment Bill is good. The Congress party tried to score political brownie point on this issue by pressing for the cap in the bill."
As told to Debobrat Ghose
Professor Arun Kumar is a former Sukhamoy Chakravarty Chair Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University