Goods And Service Tax; Towards A Silent Economic Revolution

GOODS AND SERVICE TAX; TOWARDS A SILENT ECONOMIC REVOLUTION Om Prakash Yadav Now distribution of portfolios amongst Ministers is over, the government is expected to come back to business within a couple of days. Finance minister has categorically stated that he would be presenting a full budget in July and assured optimistically and enthusiastically that growth and fiscal deficit would be taken care of simultaneously. It is not as easy as it apparently looks to be especially in view of prevailing global financial conundrum. The fiscal deficit and revenue deficit have been far ahead of targets set by FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT, 2004. Thanks to huge financial stimulus packages and injection of liquids in the markets by lowering REPO, Reverse REPO, CRR and SLR. by RBI as monetary measures. Farmer loan waiver has added additional financial burden on the state’s coffer. FROM WHERE HUGE REVENUE WILL COME- The UPA has secured mandate on AAM ADMI’s aspirations and therefore it has to deliver accordingly. The Rural development and welfare schemes require huge revenue. Pertinent question is from where will money come without enhancing existing tax burden? The government has already hinted at more relief in direct tax; thus challenge of the government would be immense magnitude. The government can generate additional revenues from indirect taxes without enhancing the existing tariff. The fact of the matter is that indirect tax in one area where very

fewer reforms have been made over a couple decades. Kelkar, chairman of 13th Finance Commission has evolved an excellent and modern indirect tax regime known as GST (goods and service Tax), which, if all goes well would be made operational from 1st April, 2010. Unfortunately very little information is available in the public domain about it. The government has many challenges before it in implementing and making it a huge success in terms of amount of revenue collection. A consensus has to be arrived at in the Empowered Committee of States Finance Ministers(ECSFM) so that all states agree to it and help evolve a tax regime which is in congruent with the new global financial order dominated by culture of corporate governance. WHY A NEW INDIRECT TAX REGIME?1990s marked the beginning of new era of economic policy after formally eschewing Nehruvian socialistic pattern of economy. Subsequently policy of liberalization, globalization and privatization (LPG) became new mantras of development. New economic and industrial policy spurred the growth and India could shed its stereotype image of Hindu growth rate. We brought in reforms in almost all sectors of Economy; this led to rapid growth in sectors like service, manufacturing, capital market and finance. Gradually culture of corporate governance and finance capitalism ushered in our country’s economic arena. But indirect tax regime remained one area where minimum amount of reform was made. In fact it represents grotesque of erstwhile economy fettered with obstinate regulations. With the economic growth registering around 7-9%, over a

decade, India needs to bring about a massive overhauling of existingtax regime. Present regime is marked by plethora of taxes collected both by States and the Centre. This system of taxation is cumbersome, complicated and taxing as well as unfriendly to honest tax payers. Sometimes, the amounts spent on collection of taxes are more than that of collected tax itself. Across states it is also, many a times, non-rational, impractical and unscientific. It is in this backdrop, Vijay Kelkar, chairman of 13th Finance commission was given the job of making it rational and modern in tune with developed nations. The Proposed GST is being finalized by Empowered Committee of State Finance Ministers (ECSFM). If all goes well, this new system would subsume the older one. It is estimated that introduction of GST reform will add 500 billion Dollars; half the GDP of India, to state’s coffer adding 1.4% to the GDP. If it proves true, it is going to bring about a silent revolution in the history of economic development of India. The present pattern of contribution of different sectors to the GDP in terms of percentage is vastly different from what it was in pre 1990s. for instance, the Service sector’s contribution has swelled up to 50% and that of manufacturing sector stands at about 25%, whereas ; the contribution of agriculture has been drastically reduced to 24-25% in the GDP. This changing pattern is suggestive of the fact that we ought to evolve a new and modern but unified tax regime which should be in commensurate with the changing times. It is in this perspective the tax regime is urgently required to be overhauled, simplified and unified. HOW WILL THE GST HELP IN SPUR IN GROWTH AND INCREASE THE VOLUME OF COLLECTION.

There is a saying in Kautilaya’s Arthshastra, the first book on Economics in the world, that the best taxation regime is that which is based on principle of “Liberal in assessment and ruthless in collection”. The proposed GST seems to be based on this very principle.

Firstly, The introduction of GST is likely to rationalize irrational, complicated, cumbersome and multiple indirect tax and thereby plug the loop holes in this system. It will help stop pilferage and at the same time will off load the over loaded tax burden from some organizations.

Secondly, the multiple taxations have led to birth of a somewhat repressive and lethargic system of tax collection and are doing more harm than good to the growth of the economy. The red tapism in this area is loathing and no progressive country can afford it. The GST would hopefully do away with many, if not all, such anomalies in the system and metamorphose it into an efficient agency based on scientific and rational system of assessment. It would in a long run help increase the overall amount of tax collection.

Thirdly, the present system of refunding of taxes is a horrible experience. The un-refunded tax on capital goods is a bane for capital accumulation. This in a way hinders the savings also, which is a pre-requisite to the growth. If this over-taxation is done away with, it will come as a boon for the honest tax payers.

Fourthly, At present indirect taxes are collected at various points, right from manufacturing to retailer’s outlet. It involves cumbersome process of assessment and primitive ways of collection. Such systems ultimately encourage tax evasion and also increase cost of commodities. GST proposes that the indirect taxes would be levied at the destination point which would be less distorting and non-complicated.

Fifthly, - if we take into account the GDPs of countries like USA, China, Japan, they are significantly much more than that of ours. For instance GDP of G-20 Nations (chart below) suggest that India has miles to go to achieve the level of the developed nations. The ongoing economic down turn and slow down of economy across the world has given India a golden opportunity to stake claim and get a cushioned berth in the world order, but for this we are required to increase our volume of GDP at least twice the present level. The direct taxation regime has been by and large undergoing annual fine tuning and as a result of it the revenue receipt in this account has considerably increased but reform on such scale in indirect taxes has not been done. Indirect taxes are therefore urgently required to be made rationale and unified. If the GST is introduced would certainly increase the volume of the tax collection, thereby provide a great stimulus to our gently moving economy which has arrived at a level playing field vis-a-vis many major economies of the world. Country USA JAPAN GERMANY BRITAIN FRANCE ITALY CANADA CHINA India

GDP IN TRILLION USD 13.84 TRILLION USD 4.30 2.81 2.14 2.05 1.79 1.27 6.99 1 trillion dollars

Finally, Globe is moving towards economic unification. The very concept of European Union (EU) is based on a common European market based on unified and simplified taxation system. They have adopted ‘euro’ and even the concept of a European Parliament is being visualized. If

two or more nations come close and form economic unified entity (SAFTA,NAFTA,ASEAN etc are examples), why the federating units of India i.e. States do not eschew trivial economic and political interests to help establish a modern, unified and efficient tax regime. After all the very concept of distribution of taxes amongst the states were enshrined in the constitution to do away with such contradictions. PROBLEMS AHEADIt is politically naïve to think its success without hurdles. Ours is a federation and each state has a different type of tax structure. States levy octroi, entry tax, stamp duty, municipal tax etc. It is happy to believe that the states would agree and not levy these taxes in addition to GST otherwise the very concept of a common Indian market with unified and simplified tax structure would be thwarted. FM has to help arrive at consensus in ECSFM so that a new tax regime congruent with the new global financial order dominated by culture of corporate governance is evolved.