India

India adopts a national Goods and Services Tax … sort of

BY and

In a society where tax avoidance is something of a national sport, India’s new GST is something of a major achievement, write Mandar Oak and Peter Mayer

The distance between India’s mega-cities Kolkata and Mumbai is about the same as from Brisbane to Adelaide.  Goods shipped by road from Brisbane usually reach Adelaide in three days. A few years ago, The Economist reported that goods covering that distance in India can take eight days.

The reason for the difference was not cows on the roads, potholes or even communist insurgents.  It was taxation.

When a truck from Kolkata came to the border between West Bengal—its state of origin—and neighbouring Jharkhand state, it joined a long queue, waiting to pay an entry tax on the value of the goods on board.  Having crossed Jharkhand, it entered another queue—to get the tax refunded … and to pay a fresh tax to enter the state of Orissa briefly.

A truck would have averaged 11 km per hour in its journey and spent 32 hours waiting in queues at borders and checkpoints

On its journey, the truck had to pass through a number of cities.  In many of these it would have to pay another form of entry tax—the octroi— which it could also recover upon departure.

In its destination state of Maharashtra alone, the truck would have been stopped and inspected 12 times before it reached Mumbai.

The Economist estimated that the truck would have averaged 11 km per hour in its journey from east to west and it would have spent 32 hours waiting in queues at borders and checkpoints alone.

On 1 July 2017, India introduced a Goods and Services Tax with the objective of replacing the dense thicket of national, state and local taxes on consumption with a single tax. If it is successful, it may have created what some term a ‘single national market’ in India for the first time.

A game changer?

The GST reform has variously referred to as ‘a game changer for the Indian economy’, ‘mother of all economic reforms’, or the ‘one of the world’s most complex tax reforms’. Given the political as well as logistical complexities involved in getting the GST regime on its feet, the Modi government deserves to be congratulated for this accomplishment.

That said, the current version of the GST is very much a work in progress, to be fine-tuned in years to come.

It took nearly 16 years, from conception to implementation, to get to the GST regime that was unveiled in July. Discussions about it were first flagged in 2000, during the BJP-led NDA government under Prime Minister Atal Bihari Vajpayee.

Under the Congress-centred UPA government in 2005-06, then Finance Minister P. Chidambaram declared his intention that ‘the entire production-distribution chain should be covered by a national VAT (value added tax), or even better, a goods and services tax, encompassing both the centre and the states’.

The original deadline for this tax was set for 1 April 2010, perhaps without recognising that the date happened to be the April Fool’s Day?

Through various proposals and counter-proposals, committee reports and political handshakes, the idea of the GST began taking shape. By 2009, the proposal resembled the structure currently in place.

Famously, Gujarat, then under the chief ministership of Narendra Modi, opposed the GST amendment

As we now know, the original deadline was missed by seven years. Mainly because of the failure to get states on board to enact a constitutional amendment.

Alankit India GST Summit 2017 Photo: Alankitassigments Source: Wikimedia Commons

Under India’s federal structure, moving from state taxes to a consolidated GST meant that the centre needed the power to tax sale of goods—a states’ list item. Such an amendment required, apart from a special majority in the federal parliament, assent from at least 50 per cent of the states.

Finding a compromise between states with different revenue needs and different tax rates proved to be a challenge. There was also resistance from states governed by parties that were not in power in the centre.

Famously, the state of Gujarat, then under the chief ministership of Narendra Modi, opposed the GST amendment!

The constitutional amendment bill that was recently passed makes some important concessions to the states. In particular, it protects the state for up to five years against revenue loss that may occur due to the new tax regime.

Great complexity

Implementing a GST in India, a country with millions of very poor citizens and a legacy of multiple consumption taxes, has produced a tax of great complexity. This is in stark contrast to the GST in New Zealand which taxes all goods and services at a single rate, or in Australia which applies a single rate to all goods and services, excluding food and clothing.

The implementation of the GST will be governed by the GST Council. It has the power to change or revise the rates of tax applicable to different goods, and create exclusions. The Council has met once since the roll out, and has already revised rates on certain commodities.

Rates and exclusions

The new GST structure is very complicated.

Goods and services are taxed in various ways. Most food attracts no GST; processed food, transport and small restaurants attract 5 per cent; snack foods, business travel, small hotels, and work contracts attract 12 per cent: biscuits, jams, tampons, tractor parts, more expensive hotels and restaurants attract 18 per cent; after-shave, wallpaper, dishwashers, five-star hotels, and cinemas attract 28 per cent.  Mid-sized automobiles are taxed at 45 per cent and large cars at 48 per cent.

Three major items of consumption are currently outside its scope: petroleum products (for now), alcohol and real estate.

Taxes on petroleum raise about one-third of revenue for the Indian states, while those on alcohol bring in another twenty-five per cent.  The states are unwilling to give up such significant sources of income to a tax controlled by the government in New Delhi.  So, for the moment, they remain outside the GST.

Mechanisms for bringing real estate in are being canvassed.

Implementation

For the hundreds of thousands of small shop owners in India, who have kept traditional hand-written ledgers in their mother tongue, the new GST is something of a nightmare.

They are now required to file their GST reports online.  In addition to suddenly having to become computer-literate, they face the challenge of navigating the tax portal which is in English.

The burden on service-providers who operate in multiple states is also greatly increased by the new GST.  They have to file separate reports for each state.

Some stores are selling shoes individually to bring the cost below the level that attracts GST

And, in a society where tax-avoidance is something of a national sport, there are reports of small traders finding ways to dodge the new tax.  For example, if a pair of shoes costs less than ₹500, they are taxed at 5 per cent; more expensive shoes are taxed at 18 per cent.  Some stores are selling shoes individually to bring the cost below ₹500.

For the same reason, other shops are writing out separate bills for a kurta (a traditional pyjama top) and for its matching pyjama bottom. A major rice-selling firm has refused to register its trade mark, hoping thereby to qualify as unbranded rice, which does not have to pay 5 per cent GST.

Originally, all suppliers had to lodge tax returns three times each month, plus one annual return!

This proved to be a huge burden on small and medium-sized businesses, and consequently there was severe criticism of the government. Finally, the GST Council eased the administrative burden by requiring quarterly rather than monthly returns.

Prospects

To bring a reform as complex as the GST into being within Indian federalism, the government had to overcome formidable obstacles.  Difficulties and anomalies have inevitably exposed it to criticism.

Yet the government of Prime Minister Modi and Finance Minister Arun Jaitley deserves full credit for finally securing passage of the GST legislation.  Creating a supervisory GST Council to oversee adjustments to rates, the mechanics of filing returns and so on is a wise move.

A GST covering much of India’s goods and services is finally in place, and the mechanism for eventually bringing excluded items in is established.

Abolishing border taxes and octroi in many Indian states has emptied many toll booths and freed up the movement of goods and services by road across much of India.

It is not too great a stretch to foresee a time several years from now when the remaining barriers to commerce between states and regions in India are also abolished, creating a unified national market.

The realignment of the ‘economic geography’ of India, a shift in the production and storage centres around the country, will be taking place. In years to come this will be an area of interest for policymakers and scholars, as this is where major efficiency gains are likely to arise.

Featured image: Lorry traffic queueing Photo: ecourierz  Source: Wikimedia Commons

Mandar Oak is an associate professor in economics, and Peter Mayer is an associate professor and visiting research fellow in politics and international studies, both at the University of Adelaide

Published:
3rd November, 2017

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