The
UPA has secured mandate on the common man’s
aspirations and therefore it has to deliver
accordingly. The rural development and welfare
schemes require huge revenue. The pertinent question
is: from where will money come without enhancing the
existing tax burden? The government has already
hinted at more relief in direct tax; thus challenge
before the government would be of immense magnitude.
The government can generate additional revenues from
indirect taxes without enhancing the existing
tariff. The fact of the matter is that indirect tax
is one area where very fewer reforms have been made
over a couple of decades. Kelkar, chairman of the
13th Finance Commission has evolved an excellent and
modern indirect tax regime known as GST (goods and
service tax), which, if all goes well would be made
operational from April 1, 2010.
Unfortunately,
very little information is available in the public
domain about it. The government has many challenges
before it in implementing and making it a huge
success in terms of amount of revenue collection. A
consensus has to be arrived at in the Empowered
Committee of States Finance Ministers (ECSFM) so
that all states agree to it and help evolve a tax
regime which is in congruent with the new global
financial order dominated by culture of corporate
governance.
Why
a new indirect tax regime?
1990s
marked the beginning of new era of economic policy
after formally eschewing Nehruvian socialistic
pattern of economy. Subsequently, the policy of
liberalisation, globalisation and privatisation
(LPG) became new mantras of development. New
economic and industrial policy spurred the growth
and India could shed its stereotype image of Hindu
growth rate.
We
brought in reforms in almost all sectors of
economy; this led to rapid growth in sectors like
service, manufacturing, capital market and
finance. Gradually, the culture of corporate
governance and finance capitalism seeped in our
country’s economic arena. But
indirect tax regime remained one area where
minimum amount of reform was made. In fact it
represents the grotesque face of erstwhile economy
fettered with obstinate regulations. With the
economic growth registering around 7-9 per cent,
over a decade, India needs to bring about a
massive overhauling of the existing tax regime.
The
present regime is marked by plethora of taxes
collected both by States and the Centre.
This system of taxation is cumbersome, complicated
and taxing as well as unfriendly to honest tax
payers. Sometimes, the amounts spent on collection
of taxes are more than that of collected tax
itself. Across states it is also, many a
times, non-rational, impractical and unscientific.
It is in this backdrop, Vijay Kelkar, chairman of
13th Finance Commission was given the job of
making it rational and modern in tune with
developed nations. The Proposed GST is being
finalised by Empowered Committee of State Finance
Ministers (ECSFM). If all goes well, this new
system would subsume the older one. It is
estimated that introduction of GST reform will add
500 billion dollars; half the GDP of India, to
state’s coffer adding 1.4 per cent to the GDP.
If it proves true, it is going to bring about a
silent revolution in the history of economic
development of India.
The
present pattern of contribution of different
sectors to the GDP in terms of percentage is
vastly different from what it was in pre 1990s.
For instance, the service sector’s contribution
has swelled up to 50 per cent and that of
manufacturing sector stands at about 25 per cent,
whereas the contribution of agriculture has been
drastically reduced to 24-25 per cent in the GDP.
This changing pattern is suggestive of the fact
that we ought to evolve a new and modern but
unified tax regime which should be in commensurate
with the changing times. It is in this
perspective that the tax regime is urgently
required to be overhauled, simplified and unified.
How
will the GST help in spurring the growth and
increase the volume of collection?
There
is a saying in Kautilaya’s Arthshastra, the
first book on Economics in the world, that the
best taxation regime is that which is based on
principle of “Liberal in assessment and ruthless
in collection”. The proposed GST seems to be
based on this very principle.
Firstly,
The introduction of GST is likely to rationalise
irrational, complicated, cumbersome and multiple
indirect tax and thereby plug the loop holes in
this system. It will help stop pilferage and
at the same time will offload the overloaded tax
burden from some organisations.
Secondly,
the multiple taxations have led to birth of a
somewhat repressive and lethargic system of tax
collection and are doing more harm than good to
the growth of the economy. The red-tapism in this
area is loathing and no progressive country can
afford it. The GST would hopefully do away
with many, if not all, such anomalies in the
system and metamorphose it into an efficient
agency based on scientific and rational system of
assessment. It would in a long run help increase
the overall amount of tax collection.
Thirdly,
the present system of refunding of taxes is a
horrible experience. The un-refunded tax on
capital goods is a bane for capital accumulation.
This in a way hinders the savings also, which is a
pre-requisite to the growth. If this over-taxation
is done away with, it will come as a boon for the
honest taxpayers.
At
present, indirect taxes are collected at various
points, right from manufacturing to retailer’s
outlet. It involves cumbersome process of
assessment and primitive ways of collection. Such
systems ultimately encourage tax evasion and also
increase cost of commodities. GST proposes that
the indirect taxes would be levied at the
destination point which would be less distorting
and non-complicated.
if
we take into account the GDPs of countries like
the USA, China, Japan, they are significantly much
more than that of ours. For instance, GDP of G-20
Nations (chart below) suggest that India has miles
to go to achieve the level of the developed
nations. The ongoing economic downturn and
slowdown of economy across the world has given
India a golden opportunity to stake claim and get
a cushioned berth in the world order, but for this
we are required to increase our volume of GDP at
least twice the present level.
The
direct taxation regime has been by and large
undergoing annual fine-tuning and as a result of
it the revenue receipt in this account has
considerably increased but reform on such scale in
indirect taxes has not been done. Indirect
taxes are, therefore, urgently required to be made
rationale and unified. If the GST is introduced it
would certainly increase the volume of the tax
collection, thereby provide a great stimulus to
our gently moving economy which has arrived at a
level playing field vis-a-vis many major economies
of the world.
|
Country
|
GDP IN TRILLION USD
|
|
USA
|
13.84 TRILLION USD
|
|
JAPAN
|
4.30
|
|
GERMANY
|
2.81
|
|
BRITAIN
|
2.14
|
|
FRANCE
|
2.05
|
|
ITALY
|
1.79
|
|
CANADA
|
1.27
|
|
CHINA
|
6.99
|
|
India
|
|
1 trillion dollars
Finally,
the world is moving towards economic unification.
The very concept of European Union (EU) is based on
a common European market based on unified and
simplified taxation system. They have adopted
‘euro’ and even the concept of a European
Parliament is being visualised.
If
two or more nations come close and form economic
unified entity (SAFTA, NAFTA, ASEAN etc are
examples), why the federating units of India i.e.
States do not eschew trivial economic and
political interests to help establish a modern,
unified and efficient tax regime. After all the
very concept of distribution of taxes amongst the
states were enshrined in the constitution to do
away with such contradictions.
Problems
ahead- It is politically naïve to think
of success without hurdles. Ours is a federation and
each state has a different type of tax structure.
States levy octroi, entry tax, stamp duty, municipal
tax etc. It is happy to believe that the states
would agree and not levy these taxes in addition to
GST otherwise the very concept of a common Indian
market with unified and simplified tax structure
would be thwarted.
FM
has to help arrive at consensus in ECSFM so that a
new tax regime congruent with the new global
financial order dominated by culture of corporate
governance is evolved.
Sou
rce :
Merinews - New Delhi, India, dated 29/05/2009
