The Goods and Services Tax (GST) has been eulogised as the “quintessential tax of the century”* for its simplicity and revenue-worthiness. But these advantages will be frittered away and may even become a “new execution technique”**, if the basic structure of GST is mutilated and fractured in the way that was proposed in the latest deliberations of the Empowered Committee of State Finance Ministers.
The following issues have now come up for consideration:
Rate of tax
Rather than a single rate, which was recommended by many experts as well as the Task Force on GST of the 13th Finance Commission, the decision now is to have a floor rate and a small band of rates within which states will have the right to vary their own rates to accommodate local taxes.
Let us see how this will work. If the floor rate is, say, 10 per cent, the band may be nine, 10 and 11. So, it may be nine per cent in West Bengal, 10 per cent in Bihar, 11 in Uttar Pradesh, nine in Haryana and 11 in Punjab. If a train or truck starts from Kolkata towards Delhi and Amritsar, imagine how many different rates of services tax and goods tax (for cargo) it will encounter on its journey. Invoicing will be a nightmare and claiming input tax credit will be an even bigger nightmare than it is now. Currently at least, the service tax is only collected by the Centre yet the credit rules are still highly complicated. Imagine when states fix their own rates, how complicated the input duty credit system will become.
Consider, for instance, the current state value-added tax (VAT) rates for cigarettes. It is 20 per cent in Assam, West Bengal, Bihar, Delhi, Maharashtra and Tamil Nadu. It is 25 per cent in Odisha, 22 per cent in Punjab, 15 per cent in Kerala, 13 per cent in Madhya Pradesh and 50 per cent in Uttar Pradesh and Rajasthan. Given half a chance, the states will vary GST rates at will. For example, machine and bread will have different rates in each of the 28 states. If rates vary in neighbouring states, there will be cross-shopping or tax-tourism. Multi-rates in a federal country are more detrimental than in a unitary country because rates will vary not only among themselves but also in all the states. We should follow the example of Canada where the rate is seven per cent, and Australia where it is 10 per cent. Brazil has more rates but the country is a known example of how not to implement VAT. The international trend is towards a single rate.
Economists are unanimous in arguing that a single rate is better than multi-rates which generate complications and litigation. It increases costs for both tax administration and taxpayers. For traders, simplicity of tax and consequently, less documentation is a great virtue. The ideal combination is single rate with zero rating only for export and a very small number of exemptions.# The compliance cost of a multiple rate tends to be much higher than expected.##
Petroleum products will be part of GST but not in the Constitution Amendment Bill. This is fraught with the danger that states may push it out of GST if they want. The logic for not having it in the Bill – that there may be need for a constitutional amendment each time there is change in these items – is not sound. A general residuary item can be introduced, so that all new items can fall into it.
A common base of tax for states and the Centre will create frequent disputes on interpretation. The dispute resolution authority’s ruling could be binding only if it becomes a part of law. But it is being kept out of the Bill. This will mean that in case of a dispute, there cannot be any binding ruling by the authority. That will introduce political discretion in all issues of dispute and is a very retrograde measure.
Option to opt out
States have been allowed to join later in the same way as they did with VAT in 2005. But allowing states to opt out will mean there will be frequent entries and exits depending upon political alignments. If one chief minister gets angry or upset with the Centre, the state can go out of the GST system. So, the whole set of rules for input tax credit and the whole computer system will have to be recast. This will be an impossible system to work with. The whole trade will come to a standstill each time there is an exit.
Few people know how much trade gets disrupted if a computer goes out of order in a Custom House for just half a day. There is pandemonium and a near-riot. One can only imagine how trade will suffer when states come in and go out of the GST system or when rates differ, making the computer system immensely complicated and causing computer mechanisms and invoicing systems to go haywire. So, let us follow the Canadian and Australian model of one tax rate, which is simple and effective for federal countries. If we have to have GST, we must have it conforming to the best international practices in federal countries. The way GST is being twisted and mutilated with political overtones, it is going to be as, or even more, complicated than the system that prevails. It will be inviting a new devil to replace the old.
* Sijbren Cnossen—How should the VAT be designed P1
** Ben Tera and Julie Kajus Vol 1 –European VAT Directives 2004, Preface
# Alan A. Tait- Value Added Tax, IMF, 1988, p.42
## Vito Tanzi & Howell Zee – Tax Policy or Developing Countries, p.10
The author is former Member, Central Board of Excise & Customs