The Net Effect

India’s gst is unique in the world. There is no country of India’s size; we have nearly 1,300 million people with federal political entity, 29 states and 7 union territories. The idea of GST is that ‘all the input taxes that a taxpayer’s registered business pays can be refunded’. Earlier, we had a very sporadic input tax credit mechanism in the country.

GST is more of a digital-based tax than what we were used to earlier, a paper-based tax system. Now in the digital-based technology intensive systems, the GST software will be made available free of cost. Also, the first two months of GST roll-out will be a learning phase. So, the errors will not be taken into account by the tax-authorities to ensure sufficient learning. But we must understand that it is a very complex exercise because we are doing it under corporate federalism where we are working with the consensus among states rather than by the majority voting.

There are imperfections in every law, and GST is no exception. If we look globally, OCED countries in Europe have a GST type tax, which they call value added tax, plus VAT, which is not perfect at all. In the Indian case, we have a very complex and dysfunctional tax system. We are trying to reform it with the help of GST. Before GST, we were getting 6.5-7 per cent gross domestic product (GDP) from the goods sector alone, which is 20 per cent of India’s GDP, and 1.5 per cent of GDP from services. As our incomes go up, we consume more services than goods. So, by our design, we have created a regressive tax system as transition from the old system will mean tax rates on many goods will tend to come down and effective tax rates on services would go up.

Whenever a country has changed to GST, the revenue has increased potentially. In India’s case, in 2004-05, when VAT was implemented, states revenue went up and no compensation was needed. Similarly, in the GST scenario, the states will get 14 per cent annual increase in the base of GST.

In a major transition to a new tax that GST represents, there will be uncertainties about the legacy and the existing stocks. If I am a company, I would like to go with as little inventory in the new tax regime as possible. If you have a new model coming up, you got to figure out the fate of the older model. That’s where you give big discounts, as we are witnessing in the pre-GST sale. Thus, you are trying to reduce the uncertainty risk from the transitions, provisions and compliance cost.

Whenever there is a public policy, some will benefit, some will lose. But what matters, is the net effect on the whole economy. When you look at households, GST will raise the effective tax on some goods and services and reduce it on others. The fact that we have a multiple rate structure of 0, 5, 12, 18 and 28 per cent plus a surcharge will mean that households will have to be more open to changes. If you say that I will not change my consumption basket even when the tax rates have increased, then you are going to be negatively affected.

However wrinkled a reform may be, the secret lies in ironing it out overtime. So, let’s focus on GST’s successful implementation as it is dependent on the co-operation of taxpayers and tax officials; and opinion makers should try to see that we move in a positive and constructive way. We need to aim for a much more accountable, transparent and better system.  

(Mukul G. Asher is a Professorial Fellow, Lee Kuan Yew School of Public Policy, National University of Singapore)

— As told to Brij Pahwa