Major structural defects in designing GST     

The Discussion Paper has envisaged a model of dual GST which has got certain structural defects that need to be pointed out for correction before the second Paper comes out. The proposed GST is an under achievement compared to the professed idea of a conceptually correct GST. It is an imperfect GST which has four rates with probably numerous exemptions, four thresholds, several taxes outside GST, a highly complicated system for inter-State credit of input tax and finally with no certainty that States will always abide by the fixed rates of tax. It is destined to be more complicated and ill administered than now.

Revenue increase It has been claimed that the GST will be "collectively positive-sum game" since it will give "more relief to industry, trade, agriculture and consumers and at the same time revenue will also increase for Centre and the States due to widening of tax base and better compliance". This expectation is futile. GST is nothing but an amalgamation of existing taxes and there is no expansion of tax base. Even tax compliance cannot improve since even now it is the same VAT principle working in the Cenvat and State VAT. Moreover taxpayers and Government cannot win at the same time in terms of revenue. It is a zero-sum game and not a "collectively positive-sum game".

Inter-state credit of input tax-IGST

Under the IGST model the Centre will transfer to the importing State the credit of IGST used in payment of SGST and thus will act as a clearing house mechanism. It is quite complicated involving millions of transactions relating to payment of tax to the State, transfer of tax from the selling State to the Centre, again transfer from Centre to the buying State by book adjustment through computer system which will have to be by any standard a hugely efficient inter-netting edifice dealing with auditing by States and the Centre, monthly, quarterly and yearly statements by Centre and states which have to be matched. We must not underrate the matching of million of entries. It will be a highly complicated and burdensome administration the magnitude of which can only be imagined but not realised right now. There would be a serious problem about transfer of funds from the recalcitrant states to the Centre as it has happened earlier.

One important thing has not been explained and it is this: why and how IGST is better than State to State input credit system without Centre coming into the picture, that is, the normal system which works on the principle of Cenvat. For example, the Maharashtrian seller pays the SGST to the Maharashtrian Government, adds the tax amount in its invoice to the buyer and then sells it to the Rajasthan buyer. The buyer then takes the credit of the tax and pays the due SGST on the value added product to the Rajasthan government.

This is much more simple and can be administered by the States between themselves. If the reason for not accepting the normal system is that the predominantly exporting States would gain compared to the importing States, then the same situation will remain even in IGST also. It will always remain whatever system is accepted.

I do not find any reason why the advantages claimed in the Discussion Paper such as maintenance of uninterrupted ITC chain on inter-State transactions, self monitoring model, etc. are any special to IGST. They are equally the attributes of the normal system of inter-State credit under VAT. Thus, there is an element of overplaying the advantages of IGST which would be so complicated and ultimately will become a bigger tax jungle than the existing one.

Dual control on same tax base

A very important point is that on the common base of tax, there will be two collectors, one the Centre and other the States. In no other model of GST in any other country such a situation exists. In Canada which is most comparable to India, the tax base is common (combination of Central taxes) and on the top of it there is a State sales tax. But two authorities do not collect on the same tax base. Dual control on the same tax base is a typical diarchy which only leads to anarchy.

Zero Rating of Exports

It has been claimed in the Paper that export would be zero rated. It gives a wrong impression that export was not being zero rated earlier. The fact is that it was zero rated earlier also. The extra that will happen will be that some taxes which are not being refunded to the exporter now will also be refunded like entertainment tax, luxury tax, tax on lottery, betting and gambling, State cesses and surcharges, which will be enmeshed in the tax base. Thus, there will be just a marginally extra refund to the exporter. Just saying that 'export would be zero rated' gives a wrong impression.

GST on imports

Levying CGST and SGST on imports will make it costlier. It will be considerably more than the present levy equivalent only to the Central Excise duty. Though the higher countervailing duty will be vatable, the benefit will only go to those who either manufacture or sell and pay duty. Sectors which do not pay duty such as construction sector, railways, projects assembling manufacturing plant, electricity, newspaper, etc. will get no credit and will have to bear the extra burden of tax.

Conclusion

It would have been much better to make a dual GST by combining all Central taxes into one, all State taxes into another and allowing State to State credit following Cenvat principle. This is what has been proposed by Vijay Kelkar, chairman of 13th Finance Commission in his recent speech on the occasion of the 3rd National Conference of Assocham on GST on 29th June, 2009. That would have removed most of the problems which the proposed GST envisages. It is never too late to change the mind to avoid a permanent disruption of the tax system.