Why GST is not a good idea

Service Tax was introduced in India in 1994 and several issues plaguing Service Tax have not been yet resolved. Central Excise is a settled law but it took almost 6 decades for it to settle down. With several binding judgments, the Supreme Court has finally decided the direction of this piece of taxation (Please do remember the landmark Ujagar Prints judgment was passed only in 1989 while the Central Excise Act dates back to 1944). Even without ironing out the problems of Service Tax, the Government of India has set out on an ambitious path to unleash the GST upon us. This tax, which is supposed to revolutionize the way Indians do business and provide services, may end up becoming a policy nightmare and an operational disaster.

This is an exercise of such massive proportions akin to the one attempted by the Bhagiratha, a legendary king who features in the Hindu traditional narrative. Unifying and integrating the tax mechanisms of a nation as big as India, or even proposing such legislation is an idea that takes enormous doing. Singapore and Germany are often quoted as shining examples of the success of GST. Supporters of this conveniently forget that while the former is a city state run by a single party, the latter is a tightly bound unitary setup. If any country should be compared to India and its peculiar brand of asymmetric federalism, the nation that comes closest for such scrutiny is the United States of America. And it doesn’t have a GST.

GST seems rosy and it seems extremely beneficial on paper. But is it viable? Is it suited for India? Of course on paper. We safely assume several ideal and stable factors and also tend to think that tax regime operate in a closed system, free from outside interferences. But reality follows no laws. As soon as GST is introduced, I can guarantee you that Murphy’s Law shall kick in, in all its glory. Just because a system works well on paper, doesn’t mean that it will work in reality. If it was the case, no shuttle launched from SrihariKota would ever crash prematurely. The major stumbling blocks for GST:

1. Administrative mechanism: We all know the debacle of the merger of Air India and Indian Airlines with the staff of both the carriers up in arms (quite rightfully also) regarding their pay scales and seniority. That fire has not yet settled down and has killed the morale of the national carrier. In India, a merger between two government agencies is next to impossible, as long as appraisals and promotions are linked to seniority and regretfully, not performance.
   

   And now you talk of integrating the revenue collection services of 28 odd states and an extremely powerful Central Service into one GST collection agent. This idea, I am sure, had sent shivers down several spines in Secretariats across India.
   

This would either mean disbanding the State Sales Departments of the states or winding up the Indian Revenue Service (Customs and Central Excise), both of which are plain impossible. So the erudite officers of the North Block have come up with the concept of a Dual GST. The states shall collect SGST (State GST) and the Centre shall collect the CGST(Central GST). Seems fair. But how is this any improvement over the existing CENVAT and Sales Tax regimes?

They say that SGST would give the states leverage to vary taxes within a spectrum of acceptability, ensuring some credible degree of autonomy. But once tax slabs start varying, the image of a unified market dissolves into thin air.

The businessman shall again have to face two revenue collection authorities. He shall to file returns before both, declare balance sheets and invoices, maintain registers for both, make ledger entries for both, receive show cause notices from both have raids and visits from both the officers, and jump through all the hoops for them.

Central Excise has a taxpayer base of around 5 lakh right now. Service Tax has an assessee base of another 10 lakhs and it is increasing daily (by geometric progression after the introduction of the negative list). The manpower and the IT infrastructure have not kept up with the rising tax payer number or the increased documentation. Even today, the indirect tax administration faces several problems regarding tax collection, record maintenance, document management, logistics, recovery of arrears, litigation, an aging workforce, information technology lacunae and a general apathy towards the population, with its limited assessee base. This base is supposed to swell into an excess over 50 lakhs if GST becomes operational. Staff shortages have made life a misery already in Central Excise. With GST, the department would immediately implode.

These two major branches are planned (CGST and SGST) to be integrated under the new proposed regime. Even after 50 years of establishment of the Central Revenue Boards, there hasn’t been an iota of coordination between the two central revenue departments. Can we expect harmonization and seamless flow of data between the CBEC and the Revenue departments of 28 states? It is too much to expect.

Tobacco is also kept out of the GST list with a brand of a “demerit item”. I don’t care if it is merit or otherwise. I say that if there is manufacture or value addition, it should be brought under the GST regime. But it hasn’t been. The only plausible explanation is that Central Excise is reluctant to give up lucrative revenues from the Compounded Levy and Physical Control schemes.

Latest discussions reveal that the 200 items at state level and another 100 items at centre level will be kept out of the GST bracket. I can already imagine a group of somber violinists perform at the obituary of the dream of the unified market.

The GST would result in another un-understandable and much abused formula of sharing between the Centre and the states like the Gadgil-Mukherjee formula. And the possibility of richer states, which are contributing a larger chunk to indirect taxation (which previously would have gone into their state kitties), opposing doles and special payments out of the GST collections to specific states is distinct and would also be a valid objection.

The autonomy of a state to face an economic challenge (a drought, a flood or a crop failure) or initiate a new social welfare scheme (Arogyasri, Mid-Day Meals, special sub-plans for weaker and scheduled sections) will be severely strained under a GST regime. If MG Ramachandran was dependent upon share from the Centre for all his cash flow, he may not have been able to start the school lunch programmes. NT Rama Rao couldn’t have started the 2 Rs per kilo rice scheme if he wasn’t sure of managing his purse strings.

What is the Solution?

My answer is straightforward and simple. If it ain’t broke, don’t fix it. A minor degree of cascading of taxes is inevitable in a federal structure like ours. We clamor for a unified market, but is it possible in India? I agree that a unified market will help the nation a lot, but so will single official languages or a single practicing religion. But India needs to reconcile itself to the fact that a unified market isn’t possible, just like we have embraced our multitude of religions and languages.

Instead of pursuing an unachievable ideal of seamless flow of taxation from producer to consumer, the government should concentrate of rationalizing tax rates, removing harmful exemptions and incentives, propelling healthy competition by further lowering customs duties, expanding the existing tax base by strengthening anti-evasion, audit and intelligence wings of taxation and work towards promoting a stable and integrated market which is driven by the states rather than imposed by the Centre.

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*Thoughts expressed are personal. They don’t represent the policy of the Government in any way. This column was written as a private individual, exercising the right to free speech and opinion.

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