Goods and Services Tax (GST) being implemented, is held out to be the biggest tax reform in India since independence. As an entrepreneur, I find it a complete farce and colossal waste of opportunity while still incurring huge cost of implementation that could be avoided, and that will help the economy avoiding a needless speed-breaker. I am quite surprised that even professionals are not opposing this farcical reform.
By visiting the website of the Empowered Committee of State Finance Ministers, one learns that every tax payer will benefit with reduced burden of tax. Industry will have lower burden of tax, exporters will be able to save on taxes paid on inputs and even consumer will benefit from reduced burden of tax. In order for this to happen, government will have to lose tax revenue. Could anybody in his senses believe that government in India will implement a change in taxation that reduces their tax revenue?
It is an open secret that our exchequer has grown absolutely greedy with insatiable hunger for revenue. That governments in India are a big destroyer of wealth so to speak and that this revenue could be much better utilized for nation building in the hands of citizens is another matter. Octroi was replaced with entry tax which should have been given to local bodies but actually it is not. Road tax was supposed to be spent on building of roads but actually it is not. All new roads are built with toll tax to be paid by the users of the road (except the VIPs) who have already paid road tax. Not only that, now government charges a premium from the builders of road who need to cover not only the cost of building roads but also the premium payable to government for granting permission (and providing land) for building of roads. Thus, roads bring double revenue to the government, once as road tax on all vehicles and then, as permissions for building roads. Roads are a profit centre now and no longer a cost centre. Even major road repairs are done with imposition of toll tax. In Indore, toll tax has been imposed with commencement of construction such that toll tax collection is actually used for construction and builders don’t even need working capital. With this background, mistrust within the parts of government is inevitable, but that has to do with morality and character, not germane to modern India anymore!
The honesty of purpose is visible from simple fact that entry tax in lieu of octroi is not even proposed to be subsumed in the GST State. It means, despite three GSTs (contrary to general impression of it being a single GST or a dual GST – they are downplaying GST Interstate), entry tax will remain there to be complied with.
If lower tax burden due to higher input tax credits will induce growth, will widen the tax base and that is how the governments will get higher revenue, it can be done simply by reducing the rate of tax in existing system. This will not require any change over costs at all, and yet, tax burden could be reduced on all and sundry.
If Service Tax and Excise Duty cross credits are to be facilitated (I believe such credits are already allowed and hardly an issue), it could be done simply by merging service tax and excise duty which are both administered by the same department anyway. This will save huge cost of change over for the nation.
If Special Additional Duties, Surcharges and Cesses are a problem, they can be made creditable under CENVAT rules without making a lot of hue and cry. We do not need GST for these minor changes in a system which takes dozens of changes every year in its stride anyway.
If certain state taxes like Luxury Tax, Entertainment Tax etc are to be subsumed, it can still be done by merging them into state VAT without having to overhaul the entire indirect tax system as well.
Therefore, it is evident that little symbolic changes that GST is bringing to the economy, do not need any major upheaval of the tax system, and can be achieved with minor changes. Despite the implementation of GST, entrepreneurs will continue to suffer from the burden of compliance almost equally, for example:
After implementation of GST
Excise duty or Service Tax
Tax in lieu of CST
Entry Tax in lieu of octroi or Octroi
Entry Tax in lieu of octroi or Octroi
It is obvious that there is hardly any difference in the scenario before and after implementation of GST. The so called subsuming of luxury tax or entertainment tax is a misnomer because one who pays luxury tax or entertainment tax, does not pay VAT. In principle, one remains exposed and liable for compliance with three major taxes, Excise & Service Tax, VAT and CST, which will now be renamed as GST Central, GST State and GST interstate.
The major irritation to the trade being the barriers erected by each state in the guise of anti-tax-evasion mechanism, will still remain there despite GST. Each state has introduced a way bill (called form no 49 in MP) and few states are extremely strict and rigid on this formality and deem any lapse straightway as a tax evasion endeavor, Haryana and UP for instance. Any lapse in tendering way bill exposes the vehicle to seizure and penalty is several times the tax involved, even if transaction has actually been properly invoiced and proper tax has already been paid thereon.
This is because there will continue to be two authorities to administer GST, central government for GST Central, and state government for the GST State. For any inter-state transaction, state governments are apprehensive of movement of goods without proper invoicing. This worries the state sending the goods because it would have got tax if proper invoice had been raised. But it also worries the state receiving the goods which assumes that such un-invoiced goods will ultimately be sold in that state without final invoice, meaning they will lose VAT payable on such final invoice as well. This apprehension has encouraged almost all states to erect check-posts at the border to check documents with all goods leaving or entering the state, and for this purpose, they have introduced a way bill under their respective VAT laws, called form no. 49 in MP, which must be produced by the transporter at such check-post.
Such check-posts cause massive delays and breed corruption. It is the same problem which India faced years ago at octroi check-posts and then, almost the entire India except few cities like Mumbai, abolished octroi and replaced it with entry tax. Unfortunately, state governments could not resist lust and temptation to continue holding on to this entry-tax revenue which rightfully should have been transferred to the local bodies which were receiving octroi and lost it due to substitution with entry tax. Now there is a mistrust between local bodies and state government, leading to refusal of few left out cities to let go of the octroi.
This mistrust also exists between the state governments and the central government, and is preventing them to introduce a single GST which would have been a real reform for India. A single GST, to be administered by the central government was supposed to have following features :-
1. Abolition of state government run commercial taxes deptt – means massive savings in cost of tax collection
2. A single tax payment, a single tax return instead of present at least four or even five (Excise duty, Service tax, VAT, CST and Entry tax) because each such tax requires separate accounting, tax payment, separate input credit rules and compliance, tax returns, submission of details for annual assessment, separate assessment orders and even separate appeals against these assessment orders.
3. No need for check-post controls. Excise deptt does not need such check-post controls simply because they conduct annual audit of their assessees, operate tax evasion teams and then, are able to access the data/details of the dealer raising the invoicing to check against any spurious cenvat credit. Once single authority administers the GST, it will have access to all data throughout the country and will be easily able to check details of the supplier, and hence, will have no need for check-post. Thus, absolute freedom from delays and corruption at borders
4. Absolute uniformity of tax system across the country, just like excise or service tax uniformity. India still suffers from some lack of uniformity in VAT among the states.
5. Sharing of the revenue between the centre and the states could be a tricky problem given the massive mistrust between them, but it is a problem of just 30 odd people at the most or just a dozen people (if we count state finance ministers belonging to one political party as one agency) that should not be impossible given the attraction of massive savings in cost of collection due to abolition of commercial taxes deptt. This is purely a political problem and not a problem of numbers at all. They could start with ratio that their existing collection from all these taxes that accrues to central government and state government respectively. This ratio may vary from state to state. Besides, the States are already saving in abolished costs of commercial taxes deptt. a big time.
6. Employment of the commercial taxes department employees should not be a road block because the government could encourage them to turn entrepreneur and offer soft loans etc. These people have controlled business for whole of their life and should surely have developed some competence to run such business themselves! If not, they simply get re-trained and transferred to departments with vacancies like education with massive shortage of teachers.
7. This GST must subsume all indirect taxes except customs duty. This includes state excise on liquor, entry tax regardless of whether it is in lieu of octroi or not, all cesses and surcharges. It must ensure that there are only two indirect taxes in India, customs duty on all imports and GST on all domestic trade. Since GST does not mean one rate of tax on all products and services, different rates could be applied to different classes or categories of goods and services.
I have never understood the theory of a producing state losing revenue and a consuming state gaining it or vice versa. Each state is a consuming state and gets tax revenue (VAT) on the sales from whole sellers and retailers. They also get revenue from manufacturing units which gets deducted from the revenue from sellers under input tax credit system. In fact, states get revenue both from manufacturing units as well as from consumers. Those states that do not produce, get revenue only from consumers whatever be the tax system, simply because they do not have manufacturing units and hence, do not get any taxes from them. Inter-state movement of goods only balances the shortfall of manufacturing because consumption requires goods which must be produced in the same state or imported from another state. If they produce more than they consume, they export surplus to other states and still get revenue. Where is the question of one state losing or gaining? The issue quite simply is, expand your manufacturing if you want more revenue, regardless of whether it is fully consumed within your state or not, and regardless of whether GST is implemented or not.
1. The GST under implementation will not help our economy at all. It will only entail huge cost of implementation which could be avoided by voting against this system.
2. Genuine GST reform will require a single GST to be administered by Central Govt such that state tax collection mechanism is redundant and abolished. This saves cost of collection for the government and cost of compliance for the tax payer (who now complies with only one tax instead of say, five).
3. Any reduction in tax burden for anybody or any growth in economy due to GST is simply an eye-wash and holds no water. Any change over the tax system must yield more revenue to the government, else it will never consider it.
4. Genuine GST reform is apparently not feasible in India given the thinking and competence of our politicians and bureaucrats. Hence, existing GST must be opposed until a genuine tax reform is feasible.