Economic exercise or political spoof?
By Amitayu Sengupta
Wed, Nov 09 2016. 01 50 AM IST
A three-tiered tax structure and multiple registrations mean that GST will change very little for industries.
The focus on determining whether supplies are inter-state or intra-state is so acute that registration logically becomes the cornerstone to the system. Photo: Ramesh Pathania/Mint
Economic policy making is a difficult exercise. Matching economic logic with political realities often creates a Frankenstein that leaves both economists and political scientists nodding their heads in disbelief. The goods and services tax (GST) in India is, unfortunately, turning out to be such an exercise.
The GST is supposed to be a uniform and comprehensive indirect tax levy for goods and services. Globally, GST and value-added tax (VAT) are often interchangeably used because globally indirect taxes are not as fragmented as in India.
We have very strong silos institutionally defined. Thus, when India adopted VAT, it was only for manufacturing (goods), which was further divided into state-level VAT and central-level VAT, depending on who had tax jurisdiction over which manufacturing process. Service tax, introduced in 1994 and now an important revenue source (given the rapid rise of the service sector) is completely controlled by the centre.
Indirect taxes were a challenge for industry as a) fiscal federalism led to complicated tax slabs and compliance across states and b) successive overwriting of rules with introductions of cesses, and exemptions has made the entire regime tortuous.
GST was meant to sweep the slate clean and put in place a simpler, leaner tax levy that would ensure uniformity of indirect taxation across the country. Unfortunately, in a country where indirect tax revenues exceed direct tax revenues, such tinkering assumes great political significance.
The biggest challenge that GST faces is fiscal federalism. Robbing the states of their rights to determine their own taxes is akin to robbing them of political authority. The empowered committee of all state finance ministers was set up to resolve this challenge.
The result is a three-tiered GST system which hinges on a complicated logic of intra-state (CGST and SGST) and inter-state (IGST, to be divided between states and Centre) “supplies”. This is the first level of convolution; ideally there should be only IGST which can be divided among the states and the Centre. Most countries have one GST. Canada has a dual-tax structure, with some provinces charging provincial sales tax over and above the centralised GST. The US has not even bothered to go for GST to avoid the problems of fiscal federalism it would lead to.
The second level of convolution is the complicated “place of supply” provisions on which inter- or intra-state supply hinges. Assume you are taking an air trip where the ticket is bought by your company (which has to be registered under the GST Network, or GSTN) such that the place of supply is your office address. If, however, you buy (individuals are not expected to register under the GSTN) the ticket personally with insufficient address details, the place of supply is your travel agent. In case of inter-state transactions (assume the ticket is bought online via some over-the-air system), this opens up a can of worms.
The focus on determining whether supplies are inter-state or intra-state is so acute that registration logically becomes the cornerstone to the system. GST requires all “suppliers” engaging in business across the country to register for SGST in every state of operation. Each such registration will require periodic tax-filing, and the number of filings required under GST (despite the adoption of digital technology) is considerable.
Ironically, for a tax reform that is supposed to be progressive and forward-looking, the GST is unduly harsh on innovative sectors like digital services. Digital services over the virtual space are difficult to be pinned as inter- or intra-state transaction, which does not fit well with GST.
The brunt of it is faced by e-commerce firms. Not only are e-commerce service providers saddled with the onerous burden of collecting taxes on behalf of their sellers, both the platform and all sellers engaging with the platform are subject to registration stringencies (that do not apply for conventional brick-and-mortar suppliers) simply because they conduct their business online.
GST now is riddled by turf wars between competing authorities. There is a power struggle between the Indian Revenue Service and the Indian Administrative Service, and between state and Central tax departments with excise and customs officials announcing agitations leading up to the next Budget session.
The ongoing GST council meetings are bringing forth further convolutions. “Political correctness” in the form of “revenue-neutral rate” and “compensating states” have resulted in multiple rates with an additional cess in the final form of GST. Multiple rates brings back the risk of arbitraging (Bharuch Coconut Trading Co. vs Municipal Corporation Of Ahmedabad And Others, 1990) in the Supreme Court was a debate on whether coconut is a fruit or fibre (for taxation purposes) while the very purpose of the GST was to have a uniform levy without the appendages of cess, etc.
Where then does this leave business and industries in India? Multiple registrations, a three-tiered tax structure based on a confounding place of supply rule and baggage from the past like multiple-tax rates and cess mean that very little will actually change for industries.
The GST council, with its focus on achieving political balance, is busy placating conflicting lobbies. It has little concern for what the final result will actually entail for businesses in India. What started as an economic exercise has been reduced to a political spoof.
Amitayu Sengupta is an economist and assistant vice-president of Internet & Mobile Association of India