5 reasons why GST may not be all that it is cracked to be

Be careful what you wish for, for you may get it. Will this be the case with the goods and services tax (GST), with the Union cabinet clearing a constitutional amendment bill on 17 December to enable this new unified tax? Both houses of parliament and at least 15 states have to pass it to make GST law. So it is some time away from implementation.

 5 reasons why GST may not be all that it is cracked to be

Representational image. Flickr

Question is: is GST an unadulterated blessing, as some of its advocates assume? For answers, look at who is pushing the idea hardest.

For quite some time now, it has been clear that the people most keen on this “reform” are big industrialists, especially multinationals. Since they are big, they cannot evade state or central taxes on goods. Their crib is that they have to compete with companies in the unorganised sector which often pay no tax.

A unified GST is certainly economically efficient, since it simplifies the indirect tax structure to one general rate (or just a few of them) which all companies can pay. It is also self-collecting tax, since every company gets a deduction on the taxes already paid by its suppliers. So the buyer more or less forces his supplier to pay his part of the tax to claim his deductions.

So far, so good. But GST has its downsides in the short term. This Business Standard report gives you both the pluses and minuses of GST for various industries. Here are some additional reasons to not looking at GST as an unmixed blessing.

First, as we noted above, it helps the big more than the small. Since the proposal is that companies with a turnover of Rs 10 lakh (currently Rs 1.5 crore) will have to pay GST, it means many small companies will end up having to pay excise (or value-added) taxes. The big companies will benefit, as they will now get deductions on the taxes paid by their small suppliers. Since the initial GST rate could be anywhere from 15-25 percent (depending on what is left out of its ambit), that’s a huge tax bite for the small.

As The Economic Times notes in a report, “the key beneficiaries of GST will be sectors such as batteries, footwear, plywood, electrical appliances, ceramics, adhesives and paints, where the unorganised sector accounts for 35-70 percent of total market size.” The latter’s loss will be the gain of their competitors in the organised sector. This is why listed companies like Arvind, Liberty Shoes, Jubilant Foodworks (which runs the Domino’s and Dunkin’ Donuts franchises) and Havells India saw their share price jump, reports ET.

Second, if the unorganised sector is going to lose some of its competitive edge initially, it means there will be pressures for layoffs in companies that can’t compete as a result of GST implementation. In the short run, GST may end up costing jobs till the smaller companies learn to compete. And small companies are the biggest job creators anywhere in the world.

Third, if we assume that those evading excise (legally or otherwise) currently will henceforth start paying the tax, it means they have to raise prices to stay profitable. Taxes up, prices up. In the short-term, GST may boost the prices of some segments of the economy.

Fourth, GST more or less equalises taxation across products, and hence may be iniquitous. For example, currently centre and states can levy higher taxes on luxury goods and services (five-star dinners, cars above a certain size) and this is fair. Once GST kicks in, all goods and services may end up paying the same tax. This means the rich who buy luxury goods may pay less tax and the poor more than they should. This goes against the basic tenets of taxing the rich more and the poor less.

Of course, states and centre will make exceptions (like food items and drugs), but this can’t be done endlessly. Too many exemptions and low duties for some categories of products will defeat the very purpose of having a simplified tax structure. It will also create endless disputes between company and taxman as companies try to show their products are entitled to lower taxes and the taxman the reverse.

Fifth, GST is fundamentally anti-federal. This is why states have been resisting it so hard for years. Of course, they can be compensated for any loss of revenue, as Arun Jaitley has promised, but it still means they will not be able to raise or lower taxes as they see fit politically. Also, once in, states will not be able to opt out of GST.

GST, on balance is probably a good thing, but don’t assume it is a bed of roses or the answer to all our problems.

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Updated Date: Dec 19, 2014 16:25:31 IST