One of my school classmates asked me to write about the GST issue which is dominating political debates in India for quite some time.
GST or VAT and Service Tax are things we encounter in most countries. In Singapore (as in most other developed nations), there is just one single GST rate for sales tax. People consume goods and they pay one single, unified tax rate. Such a system removes ambiguities, allows for adjustments by the Government, and does not discriminate amongst consumers. Government might control the input prices of items like cigarettes or liquor, but not the GST concept once implemented.
India has always been unique (as it always has been in most matters) in sales tax administration. There are a plethora of tax rates across the country, and these rates vary widely amongst the states. You have VAT, Service Tax, Excise, Entertainment Tax, Luxury Tax, et al. Different government departments administer the various taxes, with hardly any communication amongst them. Companies also manipulate the various taxes to their advantage and try to pay the minimum taxes possible. This commerce-hindering sales tax regime, with complicated structures, has allowed a parallel black market to develop and is also the cause of corruption. Companies invest in extensive tax planning to reach business efficiency, which is unproductive and uncalled for. It should be easy for businesses to operate and collect/pay taxes, without intervention by government officials. Sales Tax returns by companies should be online, and must be just once a month or a quarter. If there is one unified GST rate, then there will be much less cause for confusion, and companies and consumers will tend to honour the system as the chaos in the tax administration will be reduced.
An efficient Government which wants to simplify procedures and make it easy for companies and businesses and individuals to operate efficiently would face problems from its entrenched bureaucracy, and this is inevitable in a large country like India. India has more than a million government officials, and a significant number of these employees are involved in tax administration. If things become very simple, and everything is automated (like it is in the Income Tax administration in India itself), then the interface and interaction that these folks have with the companies will reduce considerably, except in enforcement situations. And, that is not palatable to many of them.
Whenever there is a strong Opposition Party which controls the Upper House of Parliament and many States of India, then it is inevitable that there will be political clashes when the Central Government wants to introduce major reforms like the GST. This is nothing unusual in any country, but in a racuous democracy like India, it takes on monumental proportions with accusations being blasted on the numerous TV channels every evening questioning the motives behind such much-needed reforms. And, the government and party functionaries are forced to go on the defensive.
Businesses need to focus on their respective lines of businesses, not just keep satisfying the government officials. How will India grow and reach a GDP growth rate of 10% in the near future if we do not simplify matters for one and all ? The opposition parties will always object, because they are not running the government, and it is their job to try and create problems for the party running the government. They seem to be executing that plan of action very well.
A simple, straightforward, revenue-neutral single GST rate of 15% for all goods and services should fix the matter. The Government should not specifically highlight the rate in the legislation, but allow a national council on GST to modify the rate once in two years depending on economic conditions (the rate could go down as well !!!). This will indicate that the government is willing to collaborate on such economic matters.
Let us not forget a simple economic analysis which has been carried out by reputed economists (source unknown) that India’s GDP growth rate could go up by 1 to 1.5% (some folks say it could go up by even 2%) by implementing GST. It is purely a rational economic argument that justifies the implementation of one single GST rate for ALL goods and services. In countries like Singapore, to reduce the initial impact of an increase in GST (which went up from 4% to 7% a few years ago), the Government issued GST rebates to citizens. So it is possible to reduce the inflationary impact which follows after an immediate increase of sales tax – the government can help the people. May or may not work in the Indian context, but it is worthwhile looking at the experiences of the more developed countries. India rarely does that as it is proud to “invent” its own brand of taxation but as the country becomes more open to international investments, it is necessary to learn from best practices from around the world. India badly needs more foreign direct investments, and investors won’t come unless there is a clear, unambiguous, easy to administer tax regime.
In a nutshell, implementation of a single, unified GST will lead to higher sales tax collections, avoid tax evasion, increase India’s GDP growth rates by 1 to 1.5% (much needed as India marches towards a 10% GDP growth rate year after year, considered essential to create millions of new jobs and eliminate povery once and for all), increase new capital formation in the economy (much needed), and reduce black money and corruption.
Is this good for India ? Absolutely. Immediately required. But not another regime of multiple GSTs and confusing administration of these rates.
Let us make life simple, pay our taxes and grow the economy jointly (together with the opposition parties !).
6th December 2015