On 1 July 2017, Goods and Services Tax (GST) became a reality. The government hailed it as the biggest tax reform of independent India which would herald a new freedom for the nation and unify it with ‘One Nation One Tax’. Some of the claims made by the government were that GST would bring about ease of doing business; increase tax collection; lower inflation; increase GDP growth by 1-2 per cent; and check the black economy. More than a year later, we have more questions than answers and most of us have only a very limited understanding of what the GST is and what it implies.
It turns out that problems with GST are both transitional and structural. To correct for these there have been a few hundred notifications and orders from the government which have added to the confusion.
In “Ground Scorching Tax”, well-known economist and India’s leading expert on the black economy, Arun Kumar systematically and lucidly explains the reality behind GST, demystifying this complex tax for ordinary citizens.
Known for not pulling any punches, the author explains why GST is truly a ‘ground scorching tax’ and a double-edged sword for the common man, why it will increase inequality across sectors and regions, why it will hurt small businesses – everything the government does not want you to know.
Read on for a cheat sheet on finally figuring out the GST and sounding well-informed on the ‘Ground Scorching Tax’
1. What is the essential idea of the GST and how has it been formulated?
It is a combining together of indirect taxes like excise duty, sales tax and service tax. Seventeen taxes have been replaced by one and this is to lead to ease of business. GST will be calculated on ‘value addition’ and not the ‘value of the good or service’. ‘Value addition’ is the value added to the raw materials and other things purchased by the producer. ‘Value’ refers to the price at which the item is sold, that is, the value added plus the cost of purchased inputs.
2. To understand why the GST affects everybody especially the class least able to afford it, we have to understand how indirect taxes function
Indirect taxes fall on everyone’s consumption whether rich or poor—everyone comes into its net. Since the rich consume a small part of their income, they pay a smaller per cent of their income as indirect tax. The poor consume almost their entire income so they pay a tax on every item of consumption and end up paying a higher per cent of their income as taxes. That is what is meant by a tax being regressive—those who earn more pay a lower rate of tax than those who earn less. Direct taxes typically fall more on the well-off sections and therefore, are usually progressive. It is because of these characteristics of the direct and indirect taxes that it is preferable to have more of direct than indirect taxes. But, India has had the opposite with more of indirect taxes than the direct taxes
3. There are complications in tax collection as the place where the final sale takes place collects the entire tax and not the place of production
GST is passed on to the final stage since the tax paid at the intermediate stages is given back as a credit. Thus, it is said that it is a ‘destination’ based tax. If the production and distribution chain goes through various states then the state where the final sale takes place collects the entire tax. States where the intermediate stages occurred will not get the tax that they got until now under the sales tax. India is very diverse with developed states (like Tamil Nadu and Maharashtra) that produce much more of the goods and services than the lesser developed states (like Bihar and Assam). The former are called the producing states and the latter the consuming states.
4. Who is kept out of the GST bracket and how does this affect them?
The present scheme of GST accommodates this problem by exempting those with a turnover of less than Rs 20 lakh from registration under GST. Those with a turnover of between Rs 20 lakh and Rs 1.5 crore19 are under a special dispensation called ‘Composition Scheme’. They also are not required to do detailed accounting but they face severe limitations. They cannot do inter-state sales or get input credit or provide input credit to those who buy from them. In effect, they have been given concession but put at a disadvantage compared to the organized sector units that are registered and can provide input credit to those who purchase from them.
5. The GSTN has instituted GST Suvidha Providers to facilitate taxpayers interations with the GSTN and resolve queries in accounting
To ease the pain of the businesses and especially the small businesses who can barely cope with the complexity of accounting and the computerization required, ‘GSTN has selected 73 IT, ITeS and financial technology companies and 1 Commissioner of Commercial Taxes (CCT, Karnataka), to be called GST Suvidha Providers (GSPs). GSPs would develop applications to be used by taxpayers for interacting with the GSTN.’13 The GSPs could also help businesses cope with the accounting and filing.
6. Who gets a share of the GST pie?
GST is made up of three main components—a Central component (CGST), a states component (SGST) and an integrated tax (IGST) for inter-state movement. The rate of CGST and SGST is 50 per cent each of GST. From one stage of production to the next, CGST paid in the previous stage of production is to be adjusted (input tax credit) against the CGST due at the current stage and similarly for SGST.CGST cannot be adjusted against SGST or the other way round. IGST is for inter-state movement of supplies. The Centre collects it, keeps 50 per cent of it and passes the rest to the state which is importing the supply. If the exporting state had collected any of the tax on that supply then it passes that also to the importing state. A rather complex arrangement.
7. Not all States are equal under the GST regime, even besides the Special Category states
Among the states, there are Special Category states. These are mostly the border states which have special problems. That is why they are given special grants and higher devolution from the Centre. Under GST also they have been given special dispensation. Except J&K, exemption from registration for GST in special category states is fixed at Rs 10 lakh while for other states it is Rs 20 lakh. This is a bit strange given that they are usually poorer and have less developed infrastructure, they should have had a higher exemption limit so as to exclude more businesses from the purview of the difficult GST. Also, under GST, since it is a destination based tax, the poorer states with a lower proportion of manufacturing and services, are likely to get a higher share of GST. Thus, a higher level of exemption for businesses would not lead to lower collection of GST for them.
But, the point is that if some items that were earlier not taxed are now taxed and their prices go up then that would cancel the price fall in certain other items where the tax rate is lowered, assuming that the businesses will pass on the benefit to the consumers. If the total tax collection rises for indirect taxes, the average price would go up even if prices of some items drop. Even in cases where the GST rate is reduced, compared to the earlier tax on that item, the price may not fall because the producers may increase their profit. For example, tax on services has been increased making all services more expensive. These are often ‘productive services’ used in production, like, insurance, finance, telecom, transportation and trade. Since these are basic to all production, an increase in their price would raise the prices of all other goods and services even if the tax rate on some of the goods falls.
9. The e-way bill intended to keep track of movement of goods and check the black income generation has its own set of complications
The e-way bill has two parts. Part A and B. The basic information about the goods to be transported has to be entered in Part A and then the details of transportation have to be added to generate the Part B which would complete the e-way bill. The portal has the capacity to generate 75 lakh e-way bills a day. However, there are complaints that it is often slow to respond or that traders are unable to access the portal speedily due to glitches or lack of proper understanding of the system. Complications may arise if the consignment is not accepted by the person who is to receive them. Another e-way bill has to be generated for return. There may be delay due to natural calamity, riots, accident, breakdown of vehicle and so on. In such a case, the transporter has to apply for extension within four hours of the end of the deadline.
10. Why the GST will not really have a significant effect on the black market
Proponents of GST have been arguing that it would help tackle the black economy since all inputs and outputs in the entire chain of production and distribution would be computerized. This is not entirely true for the Indian GST since it has various exemptions and certain key commodities are kept out of its purview. Further, small and cottage sectors are largely outside its scope. More importantly, Indian businesses are adept at keeping two sets of accounts and they can continue to do so.