GST is going through tough times. Complex rate structure and classification of products under new tax regime. One of the main reasons behind low compliance is lack of knowledge on GST and lot of confusion around small taxpayers. Govt. took a great step but failed to foresee the hurdles ahead.
Govt. is under pressure with political pressure to make GST easy for business community with Gujarat assembly elections nearing in Gujarat where congress is using GST as one of the area to target BJP.
As a matter of fact one recent govt. was given warnings and recommendations by an expert panel headed by the Chief Economic Adviser Dr. Arvind Subramanian on 4th December,2015 on the possible rates under GST.
The question is if the Govt. would have followed those recommendations, GST could have been more easier and less complex for businesses.
Let us analyze the elements of Dr. Arvind Subramanian's report and see if it could have been a different picture today if it was followed.
What GST is capable of?
It is a model of Cooperative federalism in practice with the centre and state coming together as partners in promoting growth and to enhance employment.
Getting the GST design right is critical
GST should aim at:
1. Tax rates that protect revenue
2. Simplify Administration
4. Avoid adding to inflationary Pressures
5. Keep India in range of countries with reasonable level of Indirect taxes.
Clarification on terminology Revenue Neutral Rate (RNR)
RNR is single rate which preserves revenue at Current levels. Practically there will slab of rates but for clarity in analysis it would be appropriate to think RNR as one rate.
Identifying the exact RNR might not be right instead a range recommended.
Because identifying the exact RNR depends on a number of assumptions and imponderables committee has chosen to recommend a range for the RNR rather than a specific rate. Summary of recommended rate options included 3 rates maximum. Range should be between 15-15.5%.
Two rate structure recommended by committee
The Committee recommends a two-rate structure. The Committee would recommend that lower rates be kept around 12 %(Centre plus states) with standard rates varying between 17 and 18%.
Tax sin products at 40%
Committee recommended taxing sin products at 40%.
Precious metals enjoying concessional rates could lead to higher standard rate
If precious metals continues to enjoy highly concessional rates, the rest of the economy will have to pay in the form of higher rates on other goods, including essential ones. Very low rates on precious metals would lead to a high standard rate closer to 20 percent.
On the other hand, moderately higher taxes on precious metals, which would be consistent with the government's efforts to wean consumers away from gold, could lead to a standard rate closer to 17 percent.
Rationalization of exemptions under the GST is required
1.Tax policy cannot be overly burdened with achieving industrial, regional, and social policy goals.
2. By breaking up the value-added chain, they lead in practice to a multiplicity of rates that is unpredictable, obscured, and distortionary.
3. Alternate solution to tax exemptions such as direct transfers could be deployed.
Consequential decisions should not be undertaken over short horizons (say months) but over longer periods say 1-2 years
There should not be a hasty decision to raise rates until such time as it becomes clear that the shortfall is not due to implementation issues. For easy implementation and better compliance at an early stage we should focus on low rates and not adding to inflationary pressures will be critical. In the early stages, if that requires raising other taxes or countenancing a slightly higher deficit that would be worth considering.
Consider bringing fully into the scope of the GST commodities that are proposed to be kept outside
Bring alcohol and real estate within the scope of the GST would reduce black money generation and also help in improving governance. Bring electricity and petroleum within the scope of the GST could make Indian manufacturing more competitive. Eliminate the exemptions on health and education would make tax policy more consistent with social policy objectives.
By looking into the advice of Dr. Arvind Subramanian looks like most of the points where not considered while finalizing the GST. What if above points would have considered, there might have been a different situation of GST right now.
Definitely contribution towards the negativity of GST was not only because of the above points but also the GSTN portal which was not ready and made the taxpayers more furious.
The author is a practising Chartered Accountant with around 6 years of Post qualification experience. Currently working as a partner with RGNL and co., providing consultancy to corporate clients on GST.