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GST wins over our existing tax system because it avoids
cascading and hence improves efficiency. It beats sales
tax because it secures revenue by collecting throughout
the production chain: if a retailer escapes the sales
tax net, the entire amount is lost but with GST not only
is it more difficult to escape but also the amount lost
is only the tax on the retailer's value-added. But the
transition to GST is not easy.
In an IMF paper, 'What do (and don't) we know about the
Value Added Tax? Micheal Keen, reviewing Richard M Bird
and Pierre Pascal Gendron's The Vat in Developing and
Transitional Countries, points to one of the main
lessons from the experience of many countries that went
in for the tax: the political difficulty of making
sensible changes to a VAT once introduced.
Mistakes made at the time of introduction are hard to
undo. (Incidentally, GST is nothing but a VAT on goods
and services so Keen favours the term VAT; though given
the common usage of GST rather than VAT in the Indian
context, this piece uses 'GST' and VAT
inter-changeably.)
That's not the only lesson, though. At a recent seminar
hosted by National Institute of Public Finance and
Policy (NIPFP), Keen drew on the VAT experience of
different countries to provide some key takeaways. To
start with, he finds the efficiency of a VAT-based tax
system (what he calls the C-efficiency) varies from a
low of 33 in Mexico to a high of 105 in New Zealand,
with most countries in the range of 45-60.
While the low efficiency ratio in Mexico is attributed
to the large number of items zero-rated, the fact that,
with the exception of New Zealand, even countries like
the UK have an efficiency ratio of just 49% is sobering.
Contrary to widespread belief, reduced rates are a bad
way to help the poor; the rich gain more than the poor
from any subsidy extended by way of lower GST rates. As
the Empowered Group of State Finance Ministers struggles
with never-ending demands to add to the list of items
eligible for concessional rates, it might like to keep
that caveat in mind.
Keen concedes it is almost impossible, politically, to
remove zero rating of food and food items. (Zero-rating
refers to a scenario where you get input tax credit).
Nonetheless empirical evidence shows zero rating does
not really help the poor. Income support measures are
far better.
If, for whatever reasons, income support measures are
not possible (in the Indian context leakages and poor
targeting of beneficiaries are a perennial problem)
spending measures - eg on health, education etc - could
be a good alternative to zero rating. The success of the
Ethiopian experience where fewer items were zero-rated
but government supplemented this with more spending
targeted at the poor seems to bear this out.
Multiplicity of rates is best avoided. In the Indian
context though there is no final consensus it is likely
that we will end up with three or more rates. It would
be instructive for the Empowered Group to keep in mind
that of the 50 new Vats introduced since 1995, 60% have
one rate.
Environmental damage and sin taxes on things like fossil
fuel, alcohol and cigarettes are best addressed, not by
higher rates of GST but by additional excise tax that
should be levied over and above the GST. Exemptions
(where you don't get input tax credit) go against the
very logic of VAT by breaking the chain of tax offsets.
The only unavoidable exemption is for small businesses.
Treatment of such businesses, he points out, is very
important; many VAT failures are due to inclusion of
small businesses at low thresholds. A high thresh hold
means loss of revenue. However a low one adds to
administrative costs. Hobson's choice! But then whoever
said GST was easy.
Source :
Economic
Times,
dated
03/11/2009
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