GST: Finally it happened!
This was originally published in IIK
At least, I did not think that it will happen.
For in India, we take pleasure in announcements but very little implementation happens on the ground. Goods and Services Tax (GST), is one such thing that has been in discussion for the last 10 years with every party in the opposition preventing it from seeing the light of the day. But, when our Prime Minister showed the resolve and finally introduced it on July 1st 2017 , it definitely marks a huge beginning and is a momentous step for India.
Why should we call it A “Good and Simple Tax”
Before we sing its praises, let us understand what it is. Before GST, excise and service tax used to be a state subject, collected by various State governments. A nation with 29 states and 1.3 billion people, one can imagine how inefficient such a process can be. Take for example car sales. Before GST, there were 6 levies at various rates based on vehicle length, engine size and ground clearance. Sometimes, it is easy to produce and export from India to another nation than sell the good in another state. Such was the tax complexity. India has one of the most complex tax systems in the world and it ranks 157 out of 189 countries in this ranking. Also, the tax was levied based on where it is produced and not where it is consumed. However, worldwide, indirect tax on goods and services is always levied at the point of consumption and that too on a unified basis. This then is the concept of GST – a “One Nation, One Tax and One Market” concept. It is by far the most ambitious and biggest tax reforms ever carried out in the world. Remember, more than 150 countries in the world now have some form of GST or VAT and hence what we have done is a global best practice. As per GST, the government has categorized items in five major slabs - 0%, 5%, 12%, 18% and 28%. Essential items will have 0% GST while luxury items will have the maximum rate of 28%. All other goods and services will fall in between. It is as simple as that.
In simple terms, it will lead to the following benefits:
It will increase the economic growth by at least 1 to 2% points in the long-term.
It will bring the informal sector into the formal sector increasing the tax base and tax revenues for the country.
It will result in free flow of goods and services across states
It will reduce the transit time between checkpoints as it eliminates multiple checkpoints.
It will encourage companies to consolidate warehouses and establish bigger warehouses for efficient storage of goods. Presently our warehouses size are too small.
It will increase tax compliance ratio of our country which predominantly depends on tax as an important source of revenue. Presently the tax-to-GDP ratio is only 17% in India.
It will provide huge amounts of data for further simplification.
Why are people calling it “Gabbar Singh Tax”?
If GST provides so much good as described above, then why some people are calling it as “Gabbar Singh Tax”? Like any other major reforms, this one will also have its share of problems. Since, it involves bringing within its fold many small and medium companies, it imposes huge compliance cost on them and they may be utterly unprepared for it. As per the GST system, companies have to pay GST and claim “input credit” since it is only a tax on value added. However, in order to claim the credit, all parties in the supply chain should have paid GST. Till such time, the small businessmen is struck and therefore he is short of working capital. Sometimes, he can get refunds on time, but many times he will encounter delays. Digital compliance is the biggest worry and many traders are not digital savvy. So, they have to rely on mid-level accountants or professionals to navigate this process. In their view point, this is unnecessary headache.
Also, when the government introduced the GST, it removed tax on many essential items, but it also increased tax on many other items mostly luxury items. While people that are consuming essential items are happy, people that bought luxury items were disappointed.
Also, there is a fear that GST will stoke inflation as people will have to pay increased rates in some cases. However, this fear is not founded well since there are many items on which GST was reduced as well. Also, more than 50% of CPI basket (which measures inflation) is out of GST. Hence, this need not be a worry.
All the above hurdles are short-term in nature and should only be expected for a major tax reform. Unifying 29 states and 1.3 billion is not easy by any measure and will go through lots of birth pangs. Many mid-course corrections will have to be made as information about on ground problems surface from traders and businessmen. However, if the government is sincere in listening to those problems and adapting it accordingly, then I am sure the concept of GST will settle down smoothly in about 2 to 3 years’ time. That is a time that we all, as Indians, should be prepared to give to enable our country move into the next digital era.
If we fear change, then no change will ever come. Nor if we wait for full preparedness, even that will never happen. The best course is to introduce and then make constant improvements/corrections to the system, so that it gets better over time. Sectors like logistics, automobiles, warehousing, film production, DTH, multiplexes, etc. will benefit immensely. However, hotel accommodation with high room tariff, air conditioned restaurants, under construction immovable properties like flats, commercial renting of immovable property etc. will attract higher rates. Thus, there will be some beneficiaries and there will be some who will bear higher burden. In the end, it will all even out and India, as a nation, can hope to get more tax revenues which it can judiciously use to build our roads and metro rails.
A seed sown today, will sprawl as a huge tree in the future with permanent dividends.