GST, a work in progress

GST, a work in progress

Context

We need to immediately move towards three tax slabs, and eventually two Concerns

The introduction of the Goodsand  Services  Tax  (GST)raised  much  hope  that  itwould herald the emergence of a‘good and simple tax’ with ‘one nation, one market, one tax’

• However, there  has  been  considerableconcern with the new tax, both inits  structure  and  operational  details, including the ease of payingthe tax  and  filing  returns

Considerable work still pending

The GSTCouncil has been quite responsiveto tweak the structure and operational details to make itsimpler.Yet, considerable work needs to bedone to ensure a smooth transition and to reap the revenue andproductivity gains to the economy

Global track record of GST

According to Michael Keen, of over165 countries which have adopted GST in one form or another, only 5 have repealed it (Belize, Ghana, Grenada, Malta and Vietnam), but have reintroduced the tax later

Takes time

It is a major reform, and even asevery country makes a lot of preparations before it is introduced, ittakes time to smoothen the roughedges and settle contentious issues

Desirable features

International experience suggests that some features of the GST reform are inherently desirable, like

• Richard Bird and Pierre-Pascal Gendron, after a detailed examination of a number of countries adopting GST, suggest that in developing countries, a threshold closer to  $100,000 would eliminate 75% of the taxpayers with a revenue loss of less than 4%
• Fewer rates: Another desirable feature of a successful GSTis to have fewer rates. Multiplerates create  classification  problems,  are  harder  to  administer and would require the general rate of tax to be higher
• Testing properly: It is important to prepare well before theplunge. Most countries take atleast two years to prepare for theintroduction of reform to ensure asmooth transition. This is particularly necessary for developing and testing the technology platform,educating the tax collectors and tax payers and to avoid any anomalies in the structure of the tax.

Indian context

Structure of the tax can’t be ideal

Given that the reform had to be evolved by taking into account the views of 29

States, two Union Territories with legislatures and the Union government, compromises are inevitable and it is impossible to expect the structure of the tax to be ideal. As

Problems with GST

• The levy of three rates of cesses has also complicated the structure
• Having four tax rates and three rates of cesses should have been avoided
• As mentioned above, multiple rates create problems of classification, inverted duty structure and large-scale lobbying
• It enormously complicates the technology platform to ensure input tax creditmechanism

Solution: It therefore appears desirable to move immediately towards three slabs withthe finalgoal of reducing the slabs to two

Raising threshold

Expert opinion based on international experience shows that there is much tobe gained by having the thresholdat reasonably high levels

• International experience is that a threshold closer to $100,000 would eliminate 75% of the taxpayers and the sacrifice in terms of revenue would be less than 4%. Moreover, it is the small

Solution: It may be desirable to fix the threshold atRs50 lakh. The revenue loss will be minimal but ease of doing business will be high

Way forward

Strong political commitment, to implementing the reform, thorough advance preparation, adequate investment in tax administration and taxpayer services,extensive public education programme, support from business community and good timing of reform are the important prerequisites for successful implementation of the GST

Conclusion

It is also importantto note that problems of transitionto a major tax reform are unavoidable and most countriesgothrough this. In this regard, the approach of the GST Council must be commended for being receptive tothe concerns of businesses and in dealing with the glitches in technology