GSTsseven

deadlydefects
Governmentshouldabandonit,worktowardsaunified
Centrallevyinstead.

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WrittenbyARVINDP.DATAR,KVaitheeswaran|Updated:September19,201512:13am

Industryandlargesectionsofthemediahavebeenseducedintobelievingthat
theGSTwillaltertheeconomiclandscapeofIndiaandusherinabenign,
assesseefriendlytaxregime.(Source:Reutersfilephoto)

LalitModieffectivelybutunintentionallytorpedoedtheGSTbill.Ina
shockingdisplayofwarpedpriorities,adebateonthebiggestchangein
indirecttaxeswassacrificedatthealtarofpettypolitics.Now,with
theCongressstillunrelenting,thegovernmenthasdroppedtheplanto
conveneaspecialsessionofParliamentforpassingtheGSTbill.Ifthereis
anotherscambeforethenextsession,wecansaygoodbyetoanymeaningful
legislativebusinessbeingconducted.Butthisinterludeshouldgivethenation
timetorethinkwhethertheheadlongpursuitofacomplexandmangledGST
isreallyinIndiasinterest.Canweaffordsuchacataclysmicchangeatatime
whenthereisacriticaldeclineinthemanufacturingandservicessectors?

Industryandlargesectionsofthemediahavebeenseducedintobelievingthat
theGSTwillaltertheeconomiclandscapeofIndiaandusherinabenign,
assesseefriendlytaxregime.Indeed,initstraditionalorclassicalform,a
GSTwouldhavebeenenormouslybeneficial.ButtheIndianavatar,
unfortunately,suffersfromatleastsevendeadlydefects.
First,oneofthemainbenefitsthatthenewGSTregimepromisesisa
reductionofmultipletaxes.Butthetruthisjusttheopposite.Article246A
nowconferspoweronParliamentandeverystatelegislaturetolevygoods
andservicetax.Thus,wearelikelytohaveoneparliamentarylawandabout
28statelawsthatlevyGST.Andthereisnoconstitutionalrequirementthat
allthestatelawsbeuniform.TheGSTCouncilcanonlyrecommenda
modellawbutnothingpreventseachstatefromgoingitsownway.TheVAT
experienceistestimonytothis.SuchmultipleleviesbyParliamentandthe
states,ifnotinharmony,willhavedisastrousconsequences.

Second,afternineyears,theconstitutionalamendmenttofacilitatetheGSTis
stillpending.Andthisisjustthebeginning:theherculeantaskofdraftingthe
CentralGST,thestateGSTsandtheinterstateGSTisyettobecompleted.
Whatwillbethetextoftheselawsandtheproceduralrulesandforms?How
arewegoingtomergetheexistinglawsonexciseduty,VATandservicetax
together?And,mostimportant,howarewegoingtograntseamlessinput
credit?Itisindeedunfortunatethattheactualenactmentsandrulesonthe
GSTarestillunknownthisisadangerousareaofdarkness.Draftingthese
lawswithoutconsultingstakeholderswillonlycompoundtheconfusion.
Third,thereisstilluncertaintyaboutthefinalGSTrateorrates.Whilethe
stateswantarateof26percent,theCentreisseekingacapof1618per
cent.AGSTlevyofeven16percentisboundtoresultinlargescaletax
evasionattheretaillevel.Itisgoingtobeverydifficulttoexpectaconsumer
topay26oreven16percentonthepurchaseofarefrigeratorcostingRs

50,000.ThereisalsonoclarityonthebasicthresholdexemptionandtheGST
caneasilybederailedbymultipleratesandnumerousexemptions/
concessions.
Fourth,thebasicfeatureofanyGSTisaseamlesssystemoftaxationwhere
alldutiesonallinputs(whethergoodsorservices)aresetoffagainstthe
dutiespayableonthefinalproduct.WhilemostcountrieshaveasingleGST,
fewhaveadualGST.TheIndianversionislikelytobethemostcomplex,
withdifferentstatesenactingtheirownlaws,thus
introducingtheconceptofimportingandexportingstates.Theexclusion
ofpetroleumproducts,electricityandrealestatewillresultinagrotesque,
mangledandmutilatedIndianversionoftheGST.Whiletherecouldbe
possiblecostsavingsformanufacturersduetoaleanersupplychainandthe
eliminationofcascadingtaxes,theimpactontheservicesectorcouldbe
costlyandinflationary.
Fifth,althoughseveralcountrieshaveaGST,itiscompletelyunsuitedtoa
vast,heterogeneouscountrylikeIndia.AnessentialfeatureofIndian
federalismisthattheUnionandthestatescanlevydifferenttypesofindirect
taxestosuittheirspecialrequirements.Indeed,theneedsofstateslike
MaharashtraandGujaratarecompletelydifferentfromstateslikeJharkhand
andAssam.TheGSTisboundtoleadtoseriousdifficulties,andcould
possiblyfail,becauseitseekstotreatunequalstatesequally.Itwillbe
practicallyimpossiblefortheCentretocompensatestatesthatarelikelyto
losetaxrevenueforthenextseveralyears.
Sixth,theGSTisamergerofCentralandstateleviesrightnowadministered
byCentralandstategovernmentofficials.Howmanyassesseeswillwehave
statewise?WhowilladministeracombinedGST?Willeachstateinsiston
administeringtheGSTwithinitsterritory?Ifso,therewillbenoroleforthe
Centralexciseorservicetaxdepartments,exceptininterstatetransactions.
Whicharetheappellateauthorities?Willtherebeonetribunalormultiple
tribunals?

Seventh,theproposedGSTwillmakeimportsmorecompetitive.The
complexregulatoryandtaxlawsandrampantcorruptionateachstagemake
manufacturinginIndiaanactivityonlyforthebrave.IfIGSTonimportsis
availableasacredittoatraderasagainsttheexistingsystem,whichdoesnot
allowcountervailingdutyandspecialadditionaldutycredits,importedgoods
willgetacompetitiveadvantage,seriouslysabotagingtheMakeinIndia
initiative.
ThecourageouscourseofactionwouldbetoabandontheproposedGSTand
worktowardsaunifiedCentrallevy.Itisbestthatthetaxingpowersofthe
statearenotcurbed.VictorHugoremindedusthatyoucannotstopanidea
whosetimehascome.ThetortuoushistoryoftheGSTinIndiaisasignthat
theIndianmodelofthistaxisanideawhosetimeshouldnevercome.Wecan
ignoretheclearwritingonthewallatourownperil.
ThewritersarepractisingadvocatesoftheMadrasHighCourtand
SupremeCourt