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One year since it rolled out, GST remains a potent political tool to beat Modi govt with

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A good tax system like GST, if badly implemented, can lead to high inflation and price rise, resulting in a political setback.

One nation, one tax’ was touted as one of the most desired objectives of the Goods and Services Tax (GST) when it was rolled out a year ago by the Modi government amid much fanfare and high expectations.

Prominent among other aims were a uniform tax structure, plugging the holes in the tax collection system, increased revenue, and a wider tax net covering almost every citizen.

GST is considered the ultimate panacea for many economic ills like the shadow economy, under-invoicing, cash business, unauditable trade transactions, and above all, tax evasion.

According to finance ministry sources, the GST revenue collection showed improvement in April 2018, with collections amounting to Rs 1.03 trillion (Rs 1.03 lakh crore) and 6.04 million taxpayers filing their returns. The compliance rate stood at 69.5 per cent.

Problems aplenty

While the tax net has widened and revenue collection has increased, this trend cannot be expected to remain constant because tax collection will fluctuate due to market conditions, fall in production, and demand-supply variations.

The E-Way system (which has to generate seven to eight lakh bills per day) and the TDS/TCS system are in a mess due to the unpreparedness of the IT infrastructure responsible for the implementation and operation.

Another issue that puts a good tax system like GST in bad light is the multiple tax rates, which according to the government is unavoidable in Indian conditions. Even experts agree that one tax rate is not possible in India, but from zero to 28 per cent, we have six slabs and twin collection levels – central and state tax – making ‘one nation, one tax’ a mere slogan.

Besides, toll tax and other state taxes continue in some places, increasing the confusion and hindering the ease of business. Software glitches have made GST refunds a nightmare, and the worst hit are the exporters who earn valuable foreign exchange. In March this year, the government said that it has sanctioned refunds to the tune of Rs 10,000 crore to exporters.

Political consequences

One measure of the success of the effective GST rate structure would be the consumption choice influenced by the price and inflation matrix. The initial effect of GST was expected to push the prices up marginally, and then go into correction mode as commercial activity picked up.

Singapore witnessed a steep spike in inflation in 1994 due to GST, and Malaysia slipped into the high inflation bracket in 2015, fuelling mass unrest and leading to a change of government.

A single tax rate (6 per cent) made Malaysia’s GST simple yet complex for small traders and taxpayers (along with other factors like a tax on mass-use goods, currency depreciation and oil price fluctuation), resulting in the fall of Najib Razak government. Mahathir Mohamad returned to power two months ago on the promise of scrapping the GST.

Extrapolated on Indian conditions, in a price-sensitive society, a good tax system like GST, if badly implemented, can lead to high inflation and price rise, resulting in a political setback.

According to one economic adviser to the government, who was speaking with reference to the over-valuation of the Indian rupee, the rate of inflation in India is much higher than the global rate. Due to differential rate structure and the resultant price difference, consumer preference moves to cheaper products where alternatives are available. But non-availability of alternative products coupled with inflation makes the consumer choice difficult, thereby reducing sales. Lower consumption also means lower tax collection.

Therefore, the argument in favour of lower GST (or none) for consumer products and essential day-to-day consumables like groceries sounds logical. While it is true that milk and Mercedes cannot be taxed at the same rate, milk and other essential commodities should not be considered as tax revenue-earning commodity the same way as motor vehicles or any other luxury products.

Possible fixes

While it is nobody’s argument that GST rates must be tinkered with frequently, the government should not force compliance of the highly complicated structure, and also not take punitive measures affecting millions of traders and entrepreneurs.

The IT system supporting the filing of GST returns and facilitating input credit claim should be made user-friendly, which it is not currently.

The GST Council would be best advised to look at GST as a work in progress, and have an open mind to make changes based on inputs and lessons from other countries.

Despite being one of the best tax revenue systems followed by over 150 countries, GST remains a contentious issue and a potent political tool to beat the government with, especially during election time, as witnessed in the run up to Gujarat assembly election last year. It is very likely that a repeat of this will be seen in the months to come as parties gear up for the 2019 Lok Sabha polls.

GST is a game-changer for the economy. But it remains to be seen if it will prove to be a cure-all for our economic ills, or will the duel between good money and bad money end in greater chaos.

The author is former editor of ‘Organiser’.

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