Conceptually, the Goods and Services Tax (GST) model
proposed by the 13th Finance Commission has the potential to catapult India to
the ranks of developed nations that have the most modern and transparent
taxation systems. Politically, however, the new GST recommendations will be
vehemently opposed by powerful political and business interests that have a
stake in persisting with India’s opaque tax system which feeds the growing black
economy which many suspect could be over 40 per cent of India’s official GDP.
In fact, the new tax system seeks to strike at the
very root of the nexus between India’s politics and
business by bringing many holy cows into the indirect
tax net. This will enable the government to capture
large parts of business activities which are currently
left out of the indirect tax net. And a substantially
higher volume of business activity being brought under
the value added tax net will enable the Centre and
states to charge a relatively much lower combined GST of
12 per cent. Mind you, the current total incidence of
indirect tax levy by the Centre and states is about 24
per cent.
So the new landmark proposals seek to virtually halve
the incidence of indirect tax imposed by the Centre and
states. There can’t be a bigger fiscal stimulus than
this. Even for the consumers, this will come as a big
relief as the cost of many goods and services, which go
up because of the multiple and cascading state taxes
that exist today, will go down.
Remember, as per the present model, even petroleum
products will be part of the GST. The Left parties and
others across the political spectrum have argued that
consumers have to bear an extra 40 per cent cost on
diesel, petrol, etc purely because of indirect taxes.
The proposed GST of 12 per cent would cut that by more
than half! There are upsides for consumers and farmers,
for the GST does not exempt any sector except
unprocessed food, school and college education and
health services.
On a net basis, the economy as a whole will be a big
gainer. Remember Australia introduced the GST in 2000
and succeeded in knocking off over $16 billion of extra
costs incurred by domestic output and exports. Everyone
benefited, though there were initial fears raised by a
minority among businesses who felt they would be hurt.
The politics of the GST is very interesting. It seeks to
benefit the larger masses but sharply targets strong
vested interests in politics and business that feed on
the black economy. The biggest opposition will come from
the informal real estate developers, many of whom front
for politicians. The other sectors where politicians
have an interest in maintaining the status quo are
tobacco and liquor. Much of the liquor industry thrives
outside the state excise framework. The country liquor
and beedi industries, largely dominated by politicos,
will be captured under the proposed GST.
Over the last 15 years India has seen the emergence of a
wealthy real estate bourgeoisie as land prices in
hundreds of smaller cities have gone up by leaps and
bounds. Much of that black economy feeds the political
parties during elections. The proposed GST seeks to tax
at 12 per cent every stage of the real estate
development, starting from buying of land by the
developer and ending with the developer selling the
property to the final buyer. Taxing just the value added
portion at 12 per cent at every stage of real estate
development will reduce the overall cascading taxes that
currently fall as a burden on the end buyer. It will
also create greater transparency as those taking input
credit will be forced to invoice correctly.
The current practice of under-invoicing property will be
discouraged under the proposed GST system. The GST will
subsume the stamp duty levied by states in a phased
manner. The states earn close to Rs 40,000 crore from
stamp duty annually. Clearly this is the most lucrative
source of revenue for the states. The Centre will have
to do a grand bargain with the states and reassure them
that revenue losses in the medium term will be made up
through special transfers.
The states should also realise if they earn Rs 40,000
crore annually from stamp duty at present, it is not
inconceivable that they will earn more than double that
amount if a transparent GST brings all real estate
transactions into the official economy. Of course, the
vested interests who would get hurt in the short run
will not buy into this larger vision. It will be
interesting to see how the collective leadership of the
United Progressive Alliance will respond to the proposed
GST.
It is likely that some of the coalition partners who
control the real estate activity in states may oppose
the idea in the name of states losing revenues or the
spirit of federalism being undermined by the Centre.
These tactics will be used by those who may not want
transparency in the tax system.
Politically, the tragedy is that the larger masses who
benefit from a transparent tax system are scattered and
do not make a noise. The noise level of vested interests
often drowns out the silent majority. This has been the
experience even with the proposed Direct Tax Code which
is being vehemently opposed by sections of businesses
who feel they will be hurt by provisions such as Minimum
Alternate Tax (MAT) on gross assets or the 15 per cent
tax on Trusts run by corporate houses.
Even here, the fact that the vast majority — over 96 per
cent — of individual tax payers, who will come under the
10 per cent tax bracket (the lowest in the world), is
pretty much going unnoticed and unsung. However, the
politician must remember that this silent majority does
vote every five years. There is an urgent need to
separate facts from all the noise that a minority can
generate in our fractious democracy.
