No country with India’s geographical size, complexity or population, could have reined in inflation amidst a choppy global environment and still effectively execute GST, but the Modi government did that and much more, writes the author.
“Taxes are what we pay for a civilised society, including the chance to insure,” - Wendell Holmes Jr.
The Goods and Services Tax (GST), which is based on the premise of “One Nation One Tax”, makes India a unified common market. It is a single destination-based multi-stage tax on the supply of goods and services, right from the manufacturing to the consumption stage. Credits of input taxes paid at each stage are available in the subsequent stage of value addition which makes the GST essentially a tax only on value addition at each stage. The final consumer thus bears only the GST charged by the last dealer in the supply chain with set-off benefits at all previous stages. It is indeed the Input Tax Credit (ITC), besides a whole host of other progressive moves, which make the GST, as we know it in India, superior to any other consumption-based or Value Added Tax in any other country.
In China, there are three tax rates, zero per cent, five per cent and 19 per cent, but with very few items that are ‘recoverable’ or that enjoy the benefit of input tax credit. The GST rate in Canada is five per cent on supplies of goods and services and in most provinces. There is also the HST or Harmonised Sales Tax which is between 13 and 15 per cent. British Columbia, a Canadian province, discarded GST and went back to Provincial Sales Tax (PST), within just 2 years of living with GST.
What the aforesaid GST data pertaining to other countries highlights is the fact that there is no single kosher GST rate. In fact, there are over 40 different GST structures in 160 odd countries where it is applicable. Indian GST is unique due to the sheer array of numbers involving a country of 1.30 billion people and counting. For instance, there is this obnoxious attempt by naysayers to compare India with Singapore, but these critics conveniently forget that Singapore, with a population of 5.6 million is less than half of Mumbai with a population of over 13 million and growing. Also, Singapore witnessed skyrocketing inflation within a year to 8.4 per cent after GST was implemented, whereas average retail inflation in India has been sub 4 per cent in the last two years.
No country with India’s geographical size, complexity or population, could have reined in inflation amidst a choppy global environment and still effectively execute GST, but the Modi government did that and much more. In effect, of the 160 odd countries that have adopted GST, only 49 follow one tax slab module, 28 countries have two slab tax modules and all others have modified and tweaked the GST structure to align it to their country specific needs, which essentially means there is no need to follow the “All size fits one”, approach.
In fact, the seamless GST implementation by the BJP led government is a glowing tribute to what political conviction of courage can achieve. Under GST, Central Excise duty, Additional Excise duty, Service Tax and additional duty of customs (equivalent to excise), State VAT, entertainment tax, taxes on lotteries, betting and gambling, and entry tax (not levied by local bodies) have been subsumed within GST. Other taxes subsumed are Octroi, entry tax and luxury tax, thus making it a single indirect tax in India. While taxes on electricity, alcohol for human consumption, petrol and petroleum products are outside the ambit of GST currently, suitable provisions are there in the 122nd Constitutional Amendment Bill to include fuel taxes within the purview of GST at an opportune time.
On multiple occasions, the Congress that struggled with one electoral humiliation after another in various state and local body polls between 2014 and 2018, has claimed that the GST was their idea, that had been usurped by the BJP-led NDA government, which stormed to power at the Centre, post the general elections in May 2014, getting a historic mandate. The truth however, is the opposite. After initial recommendations on GST by the Vijay Kelkar Committee, the Congress led UPA failed miserably in forging a consensus for almost 10 long years on two important issues.
First pertains to the methodology of compensation to the states. And the second involves the dispute resolution mechanism under the GST. Under the erstwhile Congress-led UPA, GST merely remained an idea on paper and never came up for any seriously decisive deliberations in Parliament, so much so that even a veteran Congressman like the former Chief Minister of Maharashtra, Prithiviraj Chavan, had openly expressed his displeasure against his own party’s notion of GST, as there had been misdirected efforts at summarily replacing the Central Sales Tax (CST), with State VAT, and Value-Added Tax by bullying states and leaving them high and dry, sans any compensation whatsoever, leading to a widening trust deficit between the Union and the states under the UPA.
The Constitutional Amendment proposed by the UPA had no provision for compensating the losing manufacturing states like Tamil Nadu, Gujarat, Maharashtra and Karnataka, which were particularly apprehensive, and rightfully so. They went to the extent of raising a flag “No Compensation, No GST”. Under the Congress-led UPA, the dispute settlement authority was always a nonstarter. But the Modi government ensured that the GST Council, the adjudicating authority in case of any disputes, has one-third weightage and representation by the Union, and all states put together will have a two-thirds weightage, with the Union Finance Minister being the Chairman of the GST Council, and all state Finance Ministers shall be a part of the Council too.
Any decision by the GST Council will need a three-fourths majority for approval, in the true spirit of co-operative federalism. Unlike the UPA, under the Modi government, GST roll-out provided for 100 per cent compensation to states, for the first five years of losses incurred, including an assured 14 per cent growth in tax revenues. To forge the desired consensus with states, the BJP-led NDA coalition also gave up on the proposed one per cent entry tax by manufacturing states that was initially up for implementation, on the table. It is not surprising, therefore, that, after Assam, the first state to ratify the GST Bill on 12th August 2016, the second state to do so was Bihar, on 16th August 2016, and at that time, Bihar was not even a BJP-governed state with its ally, the JD(U).
Also, rather than getting caught in a bind on the revenue neutral rate, the Modi government, keeping in mind the complexities, presented a four-tier tax slab (without counting the zero-tax slab) in place — at five per cent, 12 per cent, 18 per cent and 28 per cent, with enabling provisions for capping tax rate and cess at 40 per cent and 15 per cent respectively. This is besides the tax on gold that is kept at 3 per cent and rough precious and semi-precious stones that are placed at a special rate of 0.25 per cent.
The herculean efforts at bridging the legacy of trust deficit left behind by the UPA and finally building trust with states, to give shape to the GST as we know it today, is best summarized thus – GST was proposed and given a go-ahead in 1999 during a meeting between the Prime Minister Atal Bihari Vajpayee and his economic advisory panel, which included three former RBI governors: IG Patel, Bimal Jalan and C. Rangarajan. In 2002, the Vajpayee government formed a task force under Vijay Kelkar to recommend tax reforms. In 2005, the Kelkar committee recommended rolling out GST as suggested by the Commission. But an inept Congress-led UPA government did zilch in taking forward the Kelkar Committee recommendations, due to lack of political will and sheer political apathy.
Contrast this with the fact that within seven months after the formation of the Modi government, the new GST Bill was introduced on 19th December 2014 in the Lok Sabha and The Constitution 122nd (One Hundred and Twenty Second Amendment) Bill, as it is technically called, was passed by the House on 6th May 2015. In the Rajya Sabha, the bill was referred to a Select Committee on 14th May 2015. The Select Committee of the Rajya Sabha submitted its report on the bill on 22nd July 2015. The bill was eventually passed by the Rajya Sabha on 3rd August 2016 and the amended bill was passed by the Lok Sabha once again on 8th August 2016. The bill, after ratification by the states, received assent from the President on 8th September 2016 before coming into effect on 1st July 2017. The reason for detailing the ardous journey of the GST Bill before it finally became an Act is to showcase the hard work, political determination and the brilliantly consensual approach of the Modi dispensation, as also the alacrity with which the biggest indirect taxation reform in Independent India, finally came to fruition.
Hence, it is time for the Congress to stop playing the ‘martyr’, and churlishly blaming the BJP for ‘snatching’ their idea, which never was their idea in any case, to start with.
The best thing about the GST is that there are no hidden taxes and what you see is what you get. Efficiency gains and prevention of leakages will bring down the overall tax burden for consumers, particularly the middle class by preventing the cascading effects of multiple taxation. For businesses, the biggest benefit is uniformity in tax rates throughout the country, which will not only enhance ease of doing business, but also make doing business within the country tax neutral, irrespective of the choice of place of doing business in any part of the country. To give relief to smaller businesses, the RCM or Reverse Charge Mechanism where the receiver pays tax and collects the ITC, Input Tax Credit, on behalf of unregistered dealers or suppliers, has been postponed to September 2019.
To further help businesses, threshold for quarterly return-filing and monthly tax payments was raised in 2018, from an earlier limit of an annual turnover Rs. 1.5 crore to an annual turnover of Rs. 5 crore. This move benefitted 93 per cent of registered GST taxpayers as only 7 per cent of businesses had to file monthly returns. To additionally ease matters, by 30th June 2019, for the preceding financial year, a consolidated GSTR-9 for regular, individual tax payers would have to be filed by those already filing GSTR1 and GSTR-3B.
GST is largely pro-poor and pro-middle class and this is amply evident from the fact that items of daily use, from milk, curd, eggs, fish, chicken and flour, to rotis, milk powder, tea, coffee, medicines, frozen vegetables, LPG, biogas, stents, kerosene, sanitary napkins and eating out in both AC and non-AC restaurants are charged either at zero per cent or five per cent tax.
The 31st GST Council meeting on 22nd December 2018 made sweeping changes, post which, barring tobacco products, luxury vehicles, molasses, airconditioners, aerated water, large TVs and dish washers, almost all items have been transferred from the 28 per cent slab to the 18 per cent and 12 per cent slabs with effect from 1st January 2019. Only 28 luxury or sin goods will remain in the highest 28 per cent bracket. This is a significant move as it broadly implies that 183 goods will be in the 0 per cent category, 308 taxed at 5 per cent, 178 in the 12 per cent and, 517 goods in the 18 per cent bracket.
Even GST on third party insurance premium for vehicles carrying goods, was lowered from 28 to 18 per cent. Subsequently, on 10th January 2018, at the 32nd GST Council meeting, the Modi government went even further ahead and raised the exemption threshold for businesses in the country from Rs. 20 lakh to Rs. 40 lakh, and for businesses specifically in the Nort-East and hilly states, to Rs. 20 lakh from Rs. 10 lakh. The threshold for those under the Composition scheme was raised from Rs. 1 crore to Rs. 1.5 crore, with the added relief that such entities will have to pay a fixed GST rate as a percentage of overall sales, by filing returns only once a year.
Again, at the 33rd GST Council meeting on 24th February 2019, the Modi government reduced GST on under-construction houses from 12 per cent to 5 per cent, and in the ‘affordable housing’ segment, it was reduced from 8 per cent to a mere 1 per cent, once again endorsing the pro-people approach of the BJP-led NDA government. A house with a carpet area of 60 square metres costing up to Rs. 45 lakh in a metro city and a house with a carpet area of 90 square metres, costing up to Rs. 45 lakh in a non metro, would be designated as “affordable”.
The best thing about the GST is that there are no hidden taxes and what you see is what you get. In just one year, for instance, 105 per cent more two-wheelers and 42 per cent more cars and SUVS have been registered in the island city of Mumbai, as of April 2018, due to elimination of a 4.5 per cent additional levy by way of octroi that was paid earlier on Mumbai registered vehicles. According to RTO officials, a significant number of buyers would prefer to register their vehicles outside Mumbai, in far off Thane or Panvel, to save costs, which would be Rs. 3000-5000 for two-wheelers, Rs. 18,000 on an average for a hatchback to roughly Rs. 60,000 for an SUV. But GST has made life easier; there is no difference between registering a car within Mumbai or outside it, as one has to pay the same road tax and insurance across Mumbai Metropolitan Region (MMR).
At its 31st meeting on 22nd December 2018, the GST Council, among other concessions which included cutting rates on 23 odd items, made services rendered to the 34 crore odd Jan Dhan accounts in the country, completely tax-exempt, showcasing that the Modi government’s clarion call of “Sabka Saath Sabka Vikaas, Sabka Vishwaas” is not a mere platitude but a work ethic that it truly abides by.
It is to the Modi government’s credit that by putting in place an optimal tax slab structure, the GST experience in India has very deftly avoided the pitfalls of the Laffer curve. The GST structure chooses to tax demerit goods at the highest rate to disincentivise “sin goods”, while keeping tax rates for items of mass consumption at zero or five per cent. The GST model, under the Modi government, strikes just the right balance between the tax base and tax rates, thereby preventing the tax structure from becoming regressive. Modinomics has indeed, trumped the traditional Laffer curve propagandists, by relying less on greed and more on an enabling environment that facilitates higher tax compliance.
[Disclaimer: The author is Economist & Chief Spokesperson, BJP Mumbai. The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Business Television India (BTVI)]