GST: It is complicated

Sushma Ramachandran

THE decks have been cleared for the introduction of the pathbreaking GST in the country in July, with Parliament approving four supplementary GST legislation. These are the Central GST (CGST), Integrated GST (IGST), Union Territory GST (UTGST) and the compensation law. These impressive acronyms merely indicate that the much-vaunted new tax is being introduced in a manner that is not ideal. Instead of a single-level taxation, as the GST is levied all over the world, in this country, it will be in the form of several levies. This goes contrary to the entire spirit of GST which is meant to be a single-point tax replacing the multiplicity of levies existing currently. It is meant to subsume excise, services and all other local levies like octroi.

The problem is that most states are worried that the introduction of GST will reduce their revenues from state level taxes. As a result, the empowered committee of state finance ministers which negotiated the launch of GST ended up providing some big revenue cushions to these states. Most important was the actual compensation that was to be given over a fixed time span to some of what are known as “producing” states. In other words, regions where industrialisation has taken root and which export many products to other parts of the country. This is opposed to what are known as “consuming” states which are not manufacturing much and instead are importing products from other regions. Obviously, the producing states have far higher revenues from excise and other state levies than the consuming ones. So, it was decided to give them compensation for the perceived loss in revenue due to subsuming state levies in GST. 

The compensaton law thus provides for states that suffer losses because of GST in the first five years of its operation. The compensation issue was one of the main aspects to be discussed after the GST Bill had been passed by Parliament last year. Many issues like the division of tax administration and taxing high sea trade as well as the compensation problem had to be discussed between the Centre and states. Fortunately, these have been resolved in time and GST is set to be launched on the target date of July 1. 

As for IGST, it has been passed to enable taxing inter-state movement of goods. In other words, even though other inter-state taxes are being dispensed with, a fresh one is being levied under the umbrella of GST. This is yet again a concession to states who are worried over the removal of  inter-state taxes that will be eliminated after the introduction of GST. There is even a state goods and services tax which can be levied by state governments so that the revenues accrue to it. The UT Act is meant to enable levy of such a tax by union territories as well.

In other words, instead of the original concept of having a single-point tax at the retail level, there will now be a multiplicity of taxes. One may try to explain GST as a tax that replaces all others, but ultimately, it has now become a hydra-headed creature with several layers of taxation. 

The only way one can rationalise these multiple taxation levels is that GST has to be introduced in this country in this imperfect manner due to the pressures from the state governments in a federal structure. It is for this reason also that the tax structure has been higher in some areas than is actually warranted. The GST Council has recommended a four-tier tax structure — 5, 12, 18 and 28 per cent. On the highest rate, a cess will be imposed on luxury goods, again to compensate states for revenue loss in the first five years of GST implementation. However, the central GST law has pegged the peak rate at 20 per cent and a similar rate has been prescribed in the state GST. This brings the peak rate to 40 per cent which apparently will come into force only in times of financial exigencies.

The problem is that most states are revenue starved and would surely like to use provisions under the GST laws to raise tax levels and reduce their budgetary deficits. They have already succeeded in keeping alcohol out of the purview of GST. Petroleum products have also been kept out of GST as these are huge cash cow for the Central government. Thus the excuse of financial exigencies can be applied at any time that the state considers there is a need for funds. While no state government would like to impose unduly high taxes which could make them unpopular, it is possible to levy high taxes on products that are not of mass consumption. This would still lead to inflationary pressures on the economy.

Thus the highest rate of 28 per cent should really be reduced considerably so that it is not raised to an uncomfortably high level either by the Centre or states. In this context, one must refer to the proposal made earlier by the Congress to embed a revenue neutral tax rate in the legislation itself. While this has been opposed by many, the fact is that it would relieve the pressure by states on the Centre for increasing the GST rate. 

The introduction of GST is being viewed as a panacea for many ills in the economy. The projection is that it would raise GDP growth by at least 1- 2 per cent, besides making it much easier to do business in the country. The fact is, however, that in the current mangled format, GST may not have the desired impact at least immediately. It could actually lead to higher inflation because of the increased tax levels on a range of products. At the same time, it is a bold experiment worth taking even if it is not being rolled out in the original format. After being launched, one can only hope that many of these infirmities are ironed out so that GST becomes a boon rather than a burden to the common man.