Faulty assumptions could derail plans

If we hear the voices of caution and if we implement the law well, GST could transform the landscape of India’s tax legislation. India is joining a bandwagon of 160-plus countries, which have embraced Value Added Tax.  There is no denying that we need to move to a comprehensive form of GST, but the law in its present form needs a lot of ironing. 

First is the fact that you will end up preparing more returns. It looks like a dealer will have to make out a minimum of three returns a month or about 36 returns per annum. And this is if he operates from one state. If he works from 20 states, he will end up filing 720 returns. This is not going to good news for the “Ease of Doing Business in India.” Two, lawyers are out of the ambit of GST. It riles. 

If the street corner Xerox shop owner has to collect GST if his turnover crosses Rs 20 lac, why not Harish Salve who makes that much money per day. Worse still, if you deal with the lawyer, you will have to fork out the 18 pc GST to the government. Of course, you will get Input Tax Credit, but that will take 30 days. 

Three, a good GST would have been one rate across products and service, or one rate for the product and another for service. At last count, we have seven rates for products, and five for services. This will open the floodgates of litigation, as questions of classification will arise. Like, cashew is taxed at 5 pc and biscuit at 18 pc. So at what rate should we tax a cashew biscuit? If there have been no such fights in the current service tax regime, it’s because all services are taxed at a flat rate. Look at the global experience. Countries like Australia, Canada, Korea, New Zealand, Singapore and South Africa collect at a single standard rate. 

Of the 30 African countries that adopted a VAT between 1990 and 2010, 23 have a single-rate system. The EU favors one standard rate.  To justify increased rates on the assumption that the poorest households spend a high proportion of their income on essentials is faulty. For, the wealthiest will also benefit from these reduced rates. The rich typically consume more of the necessities than the poor. While a single flat rate may distort the economy, it is more transparent.