The passage of the four GST Bills in the Lok Sabha is significant for two reasons. The first is political because it does appear that while the government was always open to taking suggestions, the opposition was keen on shouting it down by bringing in other extraneous issues. Hence, getting it through the House is satisfying. The second is that it now looks likely that the government will meet the target of 1 July for implementation which is what was intended to begin with. There is hence reason to feel sanguine about this development.
Getting acquiescence from all states is a major achievement but the task really begins once it is implemented. The demonetisation drive, it may be remembered, had arguments on both sides from the point of view of ideology, but it was almost universally accepted that the implementation was far from satisfactory. This has always been a problem with Indian policies where we slip on implementation even though we are astute in design.
As a diversion it may be pointed out that the UID scheme was introduced with much fanfare, but from the technology side, almost everyone is being made to run helter-skelter years after getting the identity to start linking their PAN cards, which should have been an automatic process considering that all these details are submitted when applying for the same. Such clumsiness and half-baked implementation creates a lot of apprehension on how this will play out considering that so far there has been no consorted drive by the central and state governments to educate all assesses about what GST is all about and how they are to go about it. There are Central and State GSTs which will be collected by one of them and then shared. Having five rates slabs with the cess on top of the highest slab makes the system complex as the list, which will hopefully be released by the tax authority, should elucidate how goods and services are going to be taxed so as to make the players ready.
The other area of concern is the software. One has not been informed about how one goes around paying these taxes, and three months’ time can be a major challenge for the tax assesses. The government can definitely go ahead obtrusively and insist on such compliance just as was done with the demonetisation of currency, but the regulatory burden on the players could increase in the short run.
The sharing of revenue is also important because in this melee of new tax structures there would be considerable confusion in the revenues earned or foregone. Presently the states are assuming to have 14 percent growth in commodity tax revenue which will be the benchmark for reckoning compensation that can cause some debate. This issue will take time to get ironed out as the GST is finally going to be a revenue neutral system. However it can never be perfectly neutral as there will be gains and losses and it would need to be examined as to how the scheme plays out. Further, there will be the logistics issues of transfer of funds to the states from the divisible pool given that there will be lags in receipt of payments through the year. While the cess fund is to address the quantum involved, the timely distribution will be critical.
The other concern which has popped up is the inflation impact. Presently it can be said that inflation will increase and anything between half to three quarter points because of these new tax rates. In India typically prices are inelastic in the downward direction and hence even if duties and taxes come down, the consumer may not benefit. This has been witnessed in the past too when the government lowered the duty on, say toothpaste, and the price hardly moved down by the same amount. Hence the transmission of these tax rates will be important as any product price is a complex structure of not just the final GST rate but also the cumulative effects of the other rates on the raw materials used.
A critical institution that has to be set up to take corrective action is a grievance redress cell. There are bound to be issues with states getting compensation on time, companies paying taxes as well as consumer groups once the scheme comes into effect. If we were moving with a single tax rate, things would have been simple. Now with multiple rates, it would also be difficult to gauge whether or not higher raw materials cost on account of the GST has caused price of toothpaste to go up even when the GDT rate for the final product has come down.
Hence, the challenge really begins now and getting the system moving from July is fairly audacious as these ends appear not to have been tied. It could just be another ‘jugaad’ where a system is introduced and there is automatic adjustment by all participants despite all the inconveniences. The demonetisation exercise shows that notwithstanding the pain and trauma experienced by most common people, the process was smooth despite some loud complaining. It could be the same for GST as the thought process appears to be to set it rolling first and then address the challenges that come along the way as one never gets the rules right the first time which have to be fine-tuned and tweaked along the way. India, as everyone admits, is a complex country and society which is good at adaptation. Hopefully this will hold for the GST too.
The author is Chief Economist, CARE Ratings. Views are personal
Updated Date: Mar 30, 2017 10:54 AM