A less than perfect GST is better than no GST
This year, 2016 marks 25 years of economic liberalization and could perhaps be the year when the GST – India’s biggest Indirect taxation reform – becomes a reality - creating a national common market and lowering barriers for trade and services throughout the country.
Through the summer of 2015 when most of my family and friends were holidaying, I served as a member of Parliaments Select Committee on GST. After several public consultations and deliberations, we submitted our report exactly one year back, on the 22nd of July 2015, at the top of the last monsoon session.
Since then, three sessions of Parliament have passed and to everyone’s frustration we have seen the GST bill being tossed around in a game of political football. We have already missed the deadline of 1st April 2016 for implementation. As I had written for another paper last year, the opportunity cost for obstructing the GST- even the most conservative estimates point to $20 Billion or more in one fiscal year alone . (Considering the potential 1-2% GDP growth due to GST).
Big Deal Reform
At a time when the word reform is used to describe every little change that Governments make, GST is a a real reform – the real deal in a way for an economy that is crying for reform and change to make it more efficient and competitive. It has been in the works for over a decade and its impact on our economy has been discussed and deliberated over the past few years. There is enough data and thought out there that suggests that GST reform would expand GDP by 1-2%. As I have said in the past, GST apart from creating transparency and ease to consumers, is also a big catalyst for small businesses because it creates a large open market for them, with none of the traditional barriers of costs and compliance of inter-state trading of goods. The intimidating tasks of complying with and paying 14-16 different taxes now reduced to just 2 – a state GST and a Central GST. With the elimination of the Central Sales Tax and Entry Taxes, producers can truly access the promise of the large Indian market -shipping to the farthest parts of the country away with no additional compliance costs or barriers.
By reducing the cascading effects of various taxes, it also reduces costs both to consumers and producers. With easier compliance will also come expansion of tax base. With expansion of tax base will come increased revenues to Government for its welfare and social spending needs. All these things finally contribute to transforming our economy to one which is more efficient and competitive – an important criterion in a world of increasingly competitive economies. The GST also is a consumer and business friendly taxation regime because it is also heavily invested in technology – using a GST network as a platform for compliance and filing – thus marking another reform milestone, i.e. in a new approach to tax administration without the inspector raj that consumers and businesses have grown to loath and detest.
The Governments efforts at real consensus building on GST is showing results in recent days. The addressing of the need to have dispute resolution in the law and the dropping of the 1 percent Inter-state tax which could have caused distortions and cascading effect are signs of its seriousness at getting this reform acceptable to all parties. The Empowered committee of Finance Ministers have also agreed that the net result of a new GST with its two components must be revenue neutral to states as well reducing taxation on consumers. The issue of moderate GST regime is something that government can/will address in the subsequent GST act that parliament and SGST law that state assemblies will have to pass.
All of this makes it important that the constitutional amendment to enable GST is approved by Parliament at the earliest. While most political parties and state Governments are supporting this, there is perhaps still some holdout from some quarters who are using ‘imperfections’ in the legislation as a cover to stall the bill. Ironical given that the recent history is littered with numerous cases of legislations passed that have been flawed but have since been amended to improve or fix flaws.
GST is a transformational reform. While there may be the predictable voices that will focus on the ‘imperfections’, a less than perfect GST is better than no GST. In its current form, it may be less than perfect but that is because it has its origins as a legislation built through consensus with state government amidst the fear of loss of taxation power and revenues. Every tax reform and indeed economic reform has been an evolution of an idea or law. There will be a process of evolution and improvement as GST lays its roots and expands. For instance, the GST currently has a dual structure - the SGST and the CGST, this is something that can be streamlined into one single tax in the future.
As the monsoon session enters Week three, countless Indians and I look to the Parliament to realize the dream of a common Indian market and the economic opportunity that the GST as the big reform represents. Another milestone in Transforming India can be crossed in this monsoon session! Stay tuned!
This article appeared in Financial Express on August 03, 2016