GST: Disruptive but developmental: 

GST: Disruptive but developmental: 

Context

• GST is a regime that is bringing about changes in the national value system.

What are the achievements of GST Council?

• The big unqualified win is the emergence of the GST Council as India’s first federal institution; genuinely federal and fully functional.
• In the last 70 years, despite repeated efforts, no federal institution has emerged. Be it the Finance Commission, Planning Commission or its new avtaar, the NITI Aayog, or even the Inter-State Council.
• The GST Council has changed all that. In the years to come, this Council will not only be the centrepiece of the new federal fiscal architecture, but will also be a role model for future federal institutions that are bound to come up.

What is the impact of GST Council on federalism?

• Apart from its composition, what has made the Council remarkably federal is the process of decision making.
• Every single decision has been made by building a consensus. Nothing has been put to vote. This decision by consensus has not only set a precedent but has also become the DNA of this institution.

What are the systemic changes brought by GST Council?

• The big systemic gain is that somewhere along the way the country has discovered an alternative way of formulating laws.
• On many occasions, the GST Council converted itself into a drafting committee.
• Finally, at the institutional level, GST in India is a bold experiment of pooling of sovereignty by the centre and the states in matters of taxation.
• This can have huge implications on the political economy of the nation as also on how our polity can be structured for functional purposes in the years to come.

What is the gain in the policy framework?

• In terms of policy framework, the big gain is that for the first time there are uniform rates for commodities across the country.
• There is still a long way to go before the one tax-one nation goal is achieved in letter and spirit. But there is no denying that one tax on one commodity is a reality.
• Coming from a regime of extreme dispersion of rates, not only across states but within commodity groups, this has been a big move forward.
• The move away from commodity-specific exemptions, which was the fountainhead of corruption and granting largesse, is also a giant step towards transparency.

Tax slabs and GST

• Given the fact that GST as a tax regime is still work-in-progress, the multiple rate slabs will converge overtime.
• It is very likely that the two slabs of 12% and 18% will converge to 14.5% sooner than later.
• Along with this, the number of commodities attracting 28% tax will have to be trimmed.

What is causing compliance issue?

• What is causing compliance distress is not the returns per se but the frequency of filing; from a quarterly cycle, businesses have had to move to a monthly cycle.
• It should be possible for the GST Council to address this issue based on the emerging revenue patterns.
• Depending on the size-class frequency distribution of businesses and their revenue contributions, the filing frequency can be calibrated and changed.
• It is, however, important to recognize that the compliance burden is not due to the obsessions of the tax bureaucracy. The compliance framework aids a major structural change: the formalization of the Indian economy.
• As such these are troubles of transition not to a new tax regime but to a new form of business organization.

Impact from formalization through GST

• The formalization will lead informal workers out of poverty, powerlessness, exclusion and vulnerability.
• The formalization through GST can also mean that entrepreneurs in the informal segment can more easily access capital and credit, and invest it in their businesses to obtain higher productivity and sustainability.

What are the various sectoral issues?

• At present, there are some serious sectoral issues that have surfaced.
• The main among these being the exporters and handicrafts which need to be resolved.
• The effective tax burden on exports as well as handicrafts has become very high compared to the previous tax regime. It is not just hurting growth but impairing survival.

What are the issues with GST Council?

• From a systemic point of view, there are two issues that the GST Council needs to deliberate on.
• First is the relevance of a maximum retail price (MRP) system—an anachronism from control raj days—in a GST regime.
• The MRP system was relevant in a pre-liberalized economy operating with producer taxation.
• The producers would work out the costs and margins of the distribution chain and allocate that within the MRP.
• Now it is a consumption tax, with final payment of tax at the last stage. Here, it becomes an anomaly to have an MRP. It over-determines the system.
• It is time to examine if it is right or even the mandate of the manufacturer to set the price at which a product will be sold to the end-user.
• Under GST, the MRP is more likely than not to create a retail price collusion as it becomes the de facto uniform price.
• Second is an unstated business ethics issue which is coming to the fore under the transition to GST.
• It is an open secret that businesses in India have been operating different accounts to avoid paying taxes.
• There is a fear among the business and trading community that after full implementation of GST, tax officials can analyse turnover, other details and arrive at estimates of possible tax evasion over past years.
• This fear of possible retrospective tax inspection and survey lies at the heart of the chorus against GST and its implementation.
• To boost their confidence in doing so, the GST Council could get a clarification issued that cases under the earlier tax regimes will not be reopened due to a change in volume of transactions or turnover or some other parameters under the GST regime. This done, the chorus against the so-called tardy implementation of GST will stop.