Expectations from GST

The ideal GST has just one rate. In the last Council meeting held, it was agreed to have four. This is a step in the right direction as the poor will get some relief. However, simplicity of the structure has been compromised by implementing cess for five year period to compensate the States. Maintaining a structure as simple as possible was the key and imposing cess will prove detrimental to this. If States have to be compensated and additional funds are required for the same then fiscal deficit could’ve been allowed to expand than to levy cess. Overall, to make GST a success, it is important to consider the following:

Firstly, GST must follow a hierarchy of objectives. The macroeconomic objectives of growth and employment must come at the top. The objective of revenue neutralisation can take a backseat. We should not do the same mistake as we are doing in disposal of natural resources where the objective is revenue maximisation. The jurisdiction in its bid to be transparent must not lose sight of increasing the general welfare of people. GST law should ensure benefits of lower prices are passed on to common people. This alone can maximise the positive impact of the GST on growth. Currently, the government is trying to achieve multiple objectives – pro-poor,anti-inflationary, pro-aspirational middle class, pro-revenue, pro- States etc.

Secondly, GST should aim towards building India’s global competitiveness and not reduce it. A comparative analysis of the incidence of indirect tax in the table shows that India has a long way to go before it matches up to the level of Canada, New Zealand and Singapore. Further, there can be interim problems associated with a new tax regime which cannot be ruled out.

Third, it might be a good idea to keep the overall national economy in mind.

Service sector constitutes 60 per cent of the economy and if tax rates are increased then it will lead to significantly higher cost of compliance which in turn would lead to higher rate of interest to consumers culminating into inflationary situation.

This is so because of the nature of Service sector. Unlike goods, there is no physical movement of services and many services cut across State or other geographical borders.

Fourth, coverage will be incomplete as certain items remain outside GST’ purview. These items are alcohol for human consumption, petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas, aviation turbine fuel and electricity. The design of GST can be improved considerably by moving towards a more complete coverage.

Fifth, as suggested by ex-Finance Secretary, Vijay Kelkar, there are sweeping powers vested with the GST Council. This makes it essential that the changes and deliberations are put out on discussion papers and real consultation with public takes place.

Last but not the least, do not rush. If more time is needed to roll-out GST and make it more inclusive and transparent, GoI must use the flexibility that the Constitutional amendment gives i.e. extend the roll out date beyond 1 April 2017.

Palakh Jain, Senior Fellow, Pahle India Foundation